Understanding Pump and Dump Scheme in Penny Stocks

Your investment in penny stocks would require you to know about the ‘pump and dump’ show for manipulative selling practice. The word pump is used for the short-term hype of a stock and dump refers to selling the stocks by manipulators at the peak. It is the devious scheme of stock market insiders for promoting a stock and manipulating its price for a short term to get the whole amount from the public.
If you ever get emails about any penny stock or get to read about it on several websites, it is probably a pump and dump scam. The market watchers might get various emails promoting a penny stock and it is never a good idea to follow the advice, until the time you’ve researched about the company. It is not only the case of emails but there could be other ways to reach out. Many times, the scammers hire marketing agencies to get through the majority of people and befool them by giving a greedy feel.
There could be multiple sources to promote the penny stock scams and the investors can find out the signals to understand the fraudulent ideas. If the penny stock price is shooting at a price in a short time span, there is a huge probability that it is a scam.
Why do scammers do it?
As the price of a stock shoots up, there is a feeling of trust developed in the minds of investor and they tend to buy those particular stocks for the reason of earning huge returns. The price of penny stocks is low and hence, people find it quite satisfactory to own the higher number of stocks at a lower price for the whole investment. Penny stocks are not guaranteed for giving you returns and you never know when the company drops off because there are no regulations involved.
The hints of assurance of high returns or risk-free penny stock investments are the big signals of fraud. There could be a brokerage firm selling penny stocks on pink lists or OTC market. The investor can even contact FINRA if an individual broker or any firm is trying to sell you penny stocks. Penny stocks are illiquid and if there is a sudden trading of stocks in multiple days in the row, it could be probably the case of pump & dump scheme. The tips are sent to people in different forms and they get tempted to buy the stocks. It is particularly in the case of new companies or the companies with a flat price chart for many weeks or months before the jump.
Warning Signals
Don’t ignore the warning signals of the fraudulent companies and make the appropriate choice for checking its registration. The companies registered with SEC (Securities and Exchange Commission) are better for making investments rather than the non-registered companies. You can check the financial statements of the company and its policies to see if it is the right one for investment. Don’t simply trust the praising words illustrating the worth of the company. Instead, try not to get duped into pump & dump scheme and follow the right stocks for your hard earned investment.