Anatomy Of A Classic Pump and Dump
Pump and dump is a scheme that is usually unlawful where the trading volume in penny stocks is artificially elevated and normally the price of stock which is referred to as “pumping” through a drive of propaganda which enables insiders or other large stockholders to sell their stock which are referred to as “dumping”. This is all turned to becoming illegal after the targeted innocently purchase the stock. The share price drops immediately once the plotters have sold their shares.
The approach that schemers use is quite convincing, they make it look believable that their intention is to benefit you as a victim more than the company itself. The common approach is mostly like “the company wants to expand” or “the company is trying to upsurge the shareholder value”. The advertisement is quite vibrant and undoubted to the acquitted victims.
How to spot Pump and Dump
The advertisement is very promising and luring where mostly, the time to plan and get to understand everything about the particular stock is very limited. What happens is some brokers pull you with their unbelievable promise, but when you make an appointment to talk with them they will tell you that the opportunity is long gone.
People benefiting off of chop stocks are taking advantage of dodges that need to be covered where they provide insiders to sell a lot of shares without plummeting the company’s value. The cohort with foreign investors who buy from them since they are under different law regulations, who later on sell to brokers from the original country who then sell to unaware buyers on a slightly lower price than the market price gaining the profit which is split between the foreign investor and the brokers.
The victimized investors are left with low value stock that may be hard to sell after a rather unidentified penny stock is abruptly overvalued as the next big thing. The price of the stock begins to soar as soon as many investors have purchased the stocks in the hopes of making a good profit. At this rate, the stock hits the targeted goal for the schemers where they sell all of their shares making a great profit out of it.
Why to avoid pump and dumps
Most of the time, these pump and dumps in penny stocks the promoters are usually very clever schemers who have criminal records and are using those many promotions as a way of money laundering.
A lot of fake press releases are used to create eagerness about promoted companies. These make more investors to believe on the reliability of the companies without even doing a thorough research about the companies before investing.
What happens is that these stocks are stopped without any warning by the Securities and Exchange Commission because of fraud claims. This does not give you time to withdraw yourself from the trap and you get to face a huge unrecoverable loss.
Why is pump and dump bad or good?
When the sales are quite convincing and you become among the first investors to purchase them. Then if you are lucky enough to sell your pump and dump penny stock within the time frame. Before it’s halted by the authorities, you may become one of the few beneficiaries. However, most investors aim at a longer term profit where they are willing to wait for the longer ‘anticipated’ profit, so they do not sell and in the end they lose everything and so you just got burned by a classic pump and dump.