What is a Pump and Dump Stock?
Pump and Dump, a form of investment fraud, occurs frequently every day. In fact, I received an interesting e-mail in my inbox, which pointed out Pure Biofuels Corp. (PBOF.OB) as a hot stock pick.
Here’s a copy of the e-mail:
::: PURE BIOFUELS CORP (PBOF.OB) :::
Stock Radar Presents
Get Ready!! PBOF continues!
Don’t you dare take your eyes off this one Tue,20 morning.
CURRENT PRICE: 1.50 USD
Extended Day Target: 2.025 USD (35%)
Breaking News Headline:
Entry into a Material Definitive Agreement, Change in Directors or Principal O
When this St0ck moves… WATCH OUT! CATCH THE NEW LEADER!
How Pump and Dump Stock Scams Work
Pump and dump schemes work in 3 specific phases:
- The Pump
- The Dump
Here’s a picture showing the 3 phases:
Wikipedia explains how the pump and dump process works:
A company’s web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest “hot” stock. Messages in chat rooms and bulletin board postingsor, more often, spammay urge readers to buy the stock quickly.
Unwitting investors purchase the stock in droves, creating high demand and pumping up the price. When the persons behind the scheme sell their shares (at what will soon become the peak) and stop promoting the stock, the price plummets, and other investors lose their money. (Source: Wikipedia)
Pump and dump schemes are successful scams for one reason: greed. Greedy investors are more susceptible to pump and dump stock schemes because they want riches without working hard for them. The scammers know this; this is just another spamming technique to lure away dollars from the greedy and needy.
How to Avoid A Pump and Dump Stock – 10 Tips
Pump and dump stock schemes are easy to identify if you look for red flags and suspicious activity.
Here are 10 warning signs of a pump and dump investment scam:
1. Unusually High Volume After a Press Release or E-mail Blast
Pump and dump scammers will send e-mail blasts and shady press releases to pump the price of a stock. You need to really be careful and watch for super high volume out of nowhere.
Komo Plant Foods (OTCMRKTS: KOMOF) is a good example of a pump and dump stock scheme that went from 6 cents to 30 cents in less than 1 month. Pumpers used press releases to build hype for this obscure plant-based foods stock.
Notice the huge volume spike out of nowhere on the daily chart and the corresponding price runup:
KOMOF volume went from 8k to over 1 million shares in just 1 day! That is a warning sign that the pump has begun. Of course, many novice traders bought KOMOF shares at the peak of the pump and got dumped on as the stock fell from 31 cents to 9 cents.
1. Unrecognizable “From” Fields
The scam e-mail I received had two different reply fields, “further law” & “starts”. Scammers use different techniques such as buying e-mail databases and attacking IP addresses to prey on your e-mail information. It’s a safe bet to scrutinize every e-mail message you receive. Look for “red flags” in the e-mail body that suggest suspicious activity.
2. Bold, Unkept Promises
How on earth is the recommended stock supposed to gain 35% in 1 day? There is no support, analysis, or evidence that would warrant large stock gains over the course of 1 trading day. As 02/20/2007, PBOF stock is actually down 5 cents to $1.45 per share. Pump and dump victims would have lost 4% of their investment within 9 hours. Losing money in the stock market within hours is a scary feeling.
3. No Names, No Links, No Trust
Successful pump and dumps always omit valuable contact information from the attacking e-mail/post. That way, the original sender is completely anonymous to the e-mail recipients, who may act on the false investment advice. If your broker gave you terrible investment advice, you’d pick up the phone and give him or her a piece of your mind. But when the advice comes without any contact information, i.e., name, phone number, or web address, who do you call for help?
4. Excessive Exclamation Points
Typical e-mail spam lacks this characteristic, but pump and dump stock scammers seem to have an obsession with exclamation points. Perhaps they believe adding excessive punctuation will excite more investors than a normal spam message would.
5. If It Looks Like Spam, It Probably Is
Use your common sense when you read anything online, especially investment information. “Get Rich Quick Claims” and “Hot, Secret Stock Tips” are and always will be scams because you never get something for nothing. Brilliant investors make lots of money because they put time and effort into their investments. If you want something for nothing, try playing the lottery.