Penny stocks are breeding ground for these scams

This is the era of the scam. It is sad, but in the recession when people are desperately looking for money the scammers come out in full force to take advantage of that need for money. One of the most common stock scams is the pump and dump scam.

How does a Pump and Dump Stock Scam Work?

The classic pump and dump stock scheme will start out with a person or a group of people purchasing a huge number of shares of a certain stock, generally a penny stock since they are much easier to manipulate. After they have purchased the stock they will then do everything in their ability to get out positive news about that particular stock, even if it means making up stories or issuing false press releases. There are a few common methods of transporting the message about this new “hot stock.” The most common methods are through email spam, penny stock message boards, or a simple flyer in the mail. These advertisements often promise huge results that are completely unrealistic in almost all cases.

Results of the Pump and Dump Scams

You may be wondering what generally happens when the scammers try to get you to buy a stock in order to make a quick buck. Generally the stock pops higher right after the stock becomes the subject of the scam, then quickly loses ground and falls back to where it started or even lower. In general the scammer ends up making a solid amount of money and the majority of people who bought the stock based on the tip will lose money in the period of a few days.

How can you avoid pump and dump scams?

The most important thing you need to know is this generally happens in penny stocks, which trade on pink sheets and are unregulated. It is much easier to fabricate stories about companies most people know very little about, which is why the scams typically originate in this area. It is very important that you not take the advice of people who send you email spam or give stock tips on penny stock forums or penny stock message boards. If you receive any kind of unsolicited stock advice, my best piece of advice for you is to put it in the trash and move on with your life. There are plenty of solid financial experts in this world, so there is absolutely no need to follow the lead of someone giving you unsolicited advice.