Guest Post by Bryan Sayers
The summer season is finally here. The markets have cooperated by calming down a bit from a raucous month of May when turmoil was the norm nearly every day. Time for traders to take a break and lie on sun drenched beaches, although the smell of crude oil in the air may make you reconsider your choice of location. Amidst all this calm, officials at the SEC are warning investors of the latest twist on one of the world’s oldest stock fraud schemes, the classic “Pump-and-Dump”.
As a quick refrain, courtesy of Investopedia.com, here is a brief description:
“A scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines. The victims of this scheme will often lose a considerable amount of their investment as the stock often falls back down after the process is complete.”
The criminal element in our society is very well organized and surprisingly creative when it comes to adapting their favorite designs to modern forms of media. They use the anonymity of cyberspace to their advantage, and nowhere more insidiously than with Internet based “pump-and-dump” schemes.
Nothing is off limits. The latest warnings prey on the BP oil disaster in the Gulf of Mexico. Another state Attorney General Greg Zoeller is warning investors to be extremely skeptical of “Pump-and-dump stock scams by companies claiming to have, or be in the process of obtaining, contracts with BP or government agencies pertaining to the oil spill in the Gulf of Mexico.”
Swing traders should be especially cautious in selecting their targets of opportunity since the schemes generally focus on micro-cap and penny stocks. Price manipulation is a much easier task with thinly traded stocks than with larger market-capped companies.
The latest warning signs to watch out for are:
- Claims of proficiency at cleaning up oil spills;
- Mention of contracts or contract discussions with BP about oil cleanup;
- Claims of providing assistance to BP, EPA, the Coast Guard or any other government agency;
- Projections of immediate, exponential revenue growth;
- A sense of urgency or pressure to invest immediately.
If your current trading environment does not appear as receptive as usual, you may want to try an online forex training guide. However, there are few suggestions from experts in the risk management profession to prevent this type of scam from spoiling your daily trading experience:
- Avoid Questionable Investments: Establish a moratorium on micro-cap and penny stocks. The risk level during the summer vacation season is always higher due to the lack of trading volume. Search for targets with market-caps in excess of $600 million;
- Be Skeptical of Tips and Unsolicited Advice: The Internet has facilitated online trading enormously in the past decade. However, claims, tips and all manner of advice will come streaming to you over the web. Learn to ignore it. Besides, if someone were making a fortune on a stock, why would they tell you about it?
- Do Your Own Homework: Do not rely on one source for any recommendation. Read everything you can about a company before buying the first share. A great deal of information is available publicly, and not necessarily from anonymous sources. Look for research, too, and finding none, then back away.
Department of Justice studies continually confirm that people with a little college or a college degree are the most susceptible to the con artist’s tricks and scams. This time around, let the scum artists drown in there own oily schemes. You have better things to do than listening to their latest siren call in the Gulf.