It’s fall, school is back in session, and we’re teaching more about investment fraud in all shapes and sizes. Read our latest blog post to learn what you need to know about pump and dump stock schemes.
Have you ever received a hot stock tip that sounded too good to be true? Or heard rumours online about a stock that is “the next big thing?” Check out our latest blog post to learn when to be suspicious that an investment opportunity may in fact be a pump and dump scheme.
“Pump and dump” is an illegal practice where an investor or group of investors try to artificially raise the price of their company’s stock by promoting the company with misleading information (the “pump”), then once the price of the shares they own is elevated, they sell their shares at a high profit (the “dump”).
Generally, companies involved in these schemes are small, and purport to be focused on the development of a new product or technology. They are commonly penny stocks that can experience significant price movements when the volume of the stock changes, and trade on the over-the-counter (OTC) markets.
Artificial hype about the company is created to generate excitement and interest in buying the stock. Stock promoters are often hired by the company to publicise their stock as “the next big thing.” Those running the scheme will amass large amounts of shares while also buying and selling small amounts of shares to give the appearance of active trading and further generate company interest.
Investors may hear about these investment opportunities through cold calls or emails from company representatives, “independent” glowing company reviews, a company press release, or online investment forums and chat rooms.
It can be easy to get caught up in the excitement of buying into what seems like a great investment opportunity with the potential to make significant returns. This drives up the demand for the stock – and the price. Ultimately the individuals behind the “pump” will “dump” their shares at artificially inflated prices, which will cause the stock price to tumble and other investors will lose significant sums of money.
The following are red flags of “pump and dump” schemes:
- Sudden stock price increases in a formerly thinly traded stock.
- Promises of exceptionally high returns.
- Rushed to make a decision. Beware of company websites, social media or investment newsletters that are aggressively pushing the stock. Any high-pressure or time-sensitive tactics, such as urging investors to “act quickly to make big returns on your investment” are red flags.
- Claims of “insider information” about future stock performance.
- Lack of information about the company, other than from the promoters. Review the company’s financial statements and any other disclosure that is available.