Beginner and experienced investors alike are always looking for ways to strengthen their investment acumen and increase their bottom line. Throughout this venture, it is inevitable that they will sometimes run into less than ethical investment practices. Pump and dump investing is one such practice that is best left alone. Here’s what you need to know about pump and dump investing, so that you can know it–and avoid it–when you see it:
“Pump and dump” is a term used to describe an investment practice of hyping up (or pumping up) the public perception of a stock’s value and then getting rid of (or, dumping) the stock at the inflated price as quickly as possible. The Enron scandal is a well-known example of how a pump and dump scheme works. Investors purchase pump and dump stocks at a very low price so that they can make a sizable return when they dump. Therefore, typical pump and dump stocks (also sometimes called chop stocks) are often low value, low quality stocks that have very little potential for becoming viable investment instruments any time in the near future . . . which means that the unfortunate investors who purchase these stocks are left with junk stocks, and no money.
How do Investors “pump” a Stock?
In the old days (that is, before the advent of Internet marketing), pump and dump investors relied on things like mass mailings and cold calls to hype up a stock’s value. If they wanted to pump a stock, they simply carried out a traditional marketing strategy to make the stock look attractive to the public, and then dumped once public interest supported an inflated stock price. Unfortunately, these days, dishonest investors have a much easier route for pumping stocks: the Internet. Through fraudulent press releases, boiler room “tips” on investment forums, niche websites, blogs, and a variety of social media channels, investors can pump a stock’s value in a seemingly harmless way that is often quite successful at prying money from the hands of well-meaning investors who can ill afford the expense of a value-less stock.
What to Watch Out for
Penny stocks are the easiest stocks to pump and dump. These stocks are generally traded on an “over the counter” basis, meaning investors can forego the brokerage fees associated with the NYSE, NASDAQ, and other big-time, regulated stock exchanges and trade lesser stocks very quickly and easily, and for pennies on the dollar. Before you purchase any penny stock on the advice of an “expert” investor, do ample research of the stock to verify that the inflated stock value is justifiable. Even pros like Timothy Sykes won’t invest on a whim.
Investing is an exciting, and dangerous, world. You must enter this world with a preconception of the less-than-honest people who may target you for their next big heist. Beware of pump and dump investing, keeping these considerations in mind.