How To Spot A Pump And Dump? A Quick Review:
If you are a “newbie” in trading and want to start your career by trading penny stocks, then it’s not a very bad idea. People also do gain in penny stocks but there are lots of fraudsters, willing to exploit you by using different methods. One such method is “Pump and Dump”. So, now the question is: how to protect ourselves from these people?
How to Spot a Pump and Dump scheme? Is this even possible? The answer is: YES. We have shortlisted some of the “famous methods” which the perpetrators use in pump and dump schemes. These are the following:
Penny Stocks
Keep in mind that the Pump and Dump scheme is mainly used in penny stocks or small and micro-cap stocks. This is because these stocks are illiquid i.e; its graph goes up even when there is not a large-scale purchase of these stocks.
Usually, the people who invest in penny stocks have little knowledge of trading or they are “new” in the market. So these “old chap” target these innocent people and gain profit and on the other hand, the “newbies” are badly exploited financially.
Being Approached Through Different Means Of Communication
If you are frequently getting emails, messages, phone calls, or cold calling regarding a certain stock which highlights that “Hey pal! Invest in this XYZ company! Because they have something hot to launch soon”.
This may be a true case. But this is a “Once in a blue moon” case or you can even say an impossible case. People who usually get these types of messages are the target of fraudsters. If you ever get these types of messages, then please make sure that you don’t leave any stone unturned.
Guaranteed Profit
If some people are selling penny or some other small stocks by assuring you that you will get a “Guaranteed” profit or in a loss case, you will get at least principle amount then a perpetrator has approached you. Remember, trading stocks is the game of risk-bearing. Nothing is certain in this game. Even if you invest in a big Stock Market like The New York Stock Exchange, they can’t even give you any accurate predictions. So if you are ever approached in this manner, then they are fraudsters.
Doing Research
This is the most important and essential thing to do before investing or trading. If you have complete knowledge about the mechanism and function of penny stock trading, then take a sigh of relief and start investing. But if you are still on the basics and you don’t even know about pump and dump and how to spot pump and dump then hold yourself back and gain some knowledge first.
Also, if you observe that the price of a certain stock is rising dramatically then it is recommended to observe the graphical trend of at least three months of that particular organization. A sample graph showing the trend of Pump and Dump is given below:
( A Sample Graph showing the Trends of the Pump and Dump Scheme)
Unregistered Broker And Brokerage
In some cases, it happens that the investor, who was investing with the help of a broker or a brokerage, was “not registered” and as a result, they lose their capital. Sounds quite confusing, isn’t it? The broker, dealer, and brokerage firms should be registered to ensure the trading is happening on a sound basis. But sadly, there are still some people, who are deceiving traders for their own sake.
So, to protect yourself from these fraudsters, you can find the registered broker and brokerage firm from the website of your particular Stock Exchange and in-person as well.
Conclusion
So these were some of the evident and basic tricks that are usually used by the perpetrators to entrap the traders. I hope, it will help you how to spot the pump and dump scheme. Note that “ These are SOME tricks”. Some other tricks have also been observed by the different organizations and experts as well. These are:
A sudden increase in volume, unregistered stocks, absurd bid-asked spread, etc. Also, it is recommended to do your research before investing in a particular stock. It will help you to reduce your risk of losing money.