Tips to recognize and avoid pump and dump schemes
After the infamous Ponzi scheme, the next big scam that is happening is called the pump and dump scheme. The Internet is ripe with novice investors who could be easily influenced into investing their money into such pump and dump schemes.
So, what exactly is a pump and dump scheme? Do the perpetrators get caught and punished? Is there any way to avoid pump and dump schemes? How exactly can you recognize such schemes? To know the answers to these, simply read on.
What is pump and dump scheme?
Pump and Dump, also known as ‘Ramping’ is an internet scam. Here is how it works – the investors of a particular stock aggressively promote the stock through various means. It could be done through press releases with glowing reports about the financial health of the stock, or by providing ‘insider information’ about a new product or innovation in the company which could potentially catapult the price of the stock within a few days.
Suddenly, there would be mentions about this new ‘hot’ stock in newsletters, bulletin boards, social networks, chat rooms, or even from analysts on TV or Radio. Unsuspecting investors get caught in the bait and quickly invest money into the stock. This further drives up the price of the stock.
As soon as the peak price is reached, the original fraudsters or pumpers (who had invested at a very low price) exit their entire stock. Then all the hyping of stock ceases, causing the price of the stock to tumble down. Eventually, investors lose their hard earned money that was invested.
Unfortunately, there are no real regulatory authorities to control such Pump and Dump schemes. Hence, it is always best to recognize and avoid such schemes than getting caught in them and try to get compensation for the money lost.
How to Recognize a Pump and Dump?
Below are some red flags that indicate that the stock is showing signs of pumping activities:
Another simple but effective way to check out if the company is genuine is by doing a google search of its office address. Then switch to the street view and see what pops up. Abandoned plots, P.O boxes, trees, and vacant buildings are all just scams, plain and simple!
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