Pump and dump, all over the inboxes
As the market livens up, it should be obvious to investors that the scams of the market are plentiful as well. Though the pump and dump nearly died at the beginning of the internet age, today these schemes are still doing quite well.
The pump and dump scheme is centered around two major contributors: pure speculation and illiquid stocks. Pump and dump operators never pick stocks with high volume, they instead look to find low volume stocks that can be pushed up in value on more buying volume. More people interested in buying a stock means that through competition they slowly push up the bid and ask prices.
The pump and dump also focuses on speculation. Operators push the stocks future prospects with financial news of little substance. Often the stocks are small mineral or commodity stocks that will “hit it big” with a new finding, usually in some obscure place that doesn’t really matter. But truth isn’t important, the pump and dump operator is just looking to make quick money by pumping up the value of the stock then dumping their shares.
Making a quick buck is what comes first. Pump and dump operators secure a position in a stock over time in small quantities to buy in without pushing up the price. After they have secured a position, a mass spam email, blog posts, or even forum postings hit the internet touting the “next big one.” These stocks are usually pennies per share, have little to back them up and many are on the brink of bankruptcy. Nonetheless, the operator only cares about the price of the stock, not the quality of the stock.
When hundreds, even thousands of ill informed investors begin to buy in to profit on the “big news” the price per share skyrockets. It is at this point that the operator of the scheme dumps his load of shares to new buyers to get a price sometimes 10-20 times higher than the original purchase price. You can usually tell when the operator dumps, the price spikes downward for a couple bars before buying strength takes over.
The whole operation is entirely illegal, but many operators clear profits low enough to escape prosecution. Others blast their hot stock pick to an opt-in list, making it a bit more justifiable. No matter how you look at it though, pump and dump schemes are just another way for a scammer to take the wealth of others through promising a huge return for everyone. In fact, the huge returns are just the result of lost money than anything else.
