Penny Stocks are Risky: Everyone Dumps Them After Fake Hype

Pump and dumps in the stock market. Yes they exist. Justin Bieber knows. Shaq knows.

What are they exactly?

Definition from Investopedia:

“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.” Investopedia.com

Pump and Dump’s Explained

Pump and dump scams exist in the stock market and those who get caught up in them can lose a lot of money.

Lots of money.

Traditional pump and dumps in the old days were done through cold calling by stock broker companies known as boiler rooms.

If you have seen the recent movie that is making headlines Wolf of Wall Street, the main character Jordan Belfort got rich off of scheming people and was eventually caught and convicted of stock fraud and manipulation as well as running a penny stock boiler room.

The movie was based off of the real Jordan Belfort who spent 22 months in prison and was released in 2006.

The company he ran is a typical boiler room which uses high pressure sales tactics calling gullible investors and convincing them to buy into unrealistic companies they claim will be breakout stocks and turn huge profits.

The stock brokers made commissions on the sales they made to investors so they didn’t care how well the stock did or if the investors made money or not.

It was all about generating enormous amounts of commissions.

The SEC (Securities Exchange Commission) regulates the stock market tighter in today’s times.

As a result, pump and dump schemes have transitioned to online methods as technology and the internet have advanced greatly allowing trading done online through simple clicks of a button.

Pump and Dump Scams Today

Typically they involve penny stocks because they are regulated differently than stocks listed on the stock market exchanges like New York Stock Exchange (NYSE) and NASDAQ.

Most penny stocks are trading at such cheap prices because they are not doing well financially and are slowly migrating towards bankruptcy.

In regards to regulations and penny stocks, some penny stocks are not regulated by the SEC at all and can be targeted by scammers.

The tactics scammer’s use involves them buying shares of a penny stock ahead of time before the pump and dump ever begins.

Or in Justin Bieber and Shaq’s case, paid in the form of shares for advertising stunts they did. This resulted in Justin and Shaq needing to get rid of their shares of stock by selling them in order to get cash so what better than a pump and dump scheme. Hey everyone,  Justin Bieber and Shaq own shares of this company so come buy shares before the stock price goes to the moon!

Once pump and dump scammers own shares of company XYZ, they’ll pay stock promoters and newsletter services to hype up their stock.

Thousands of gullible people still exist in the investing world and believe they can strike it rich off penny stocks and are often sucked into signing up for penny stock alerts and newsletters in hopes of getting alerts on hot stock picks.

This is also called being lazy.

Relying on and trusting someone else to give you stock picks as a result of laziness not wanting to do your own due diligence.

So these stock promoting companies have thousands of email subscribers that they can send out alerts and false hype about penny stock companies that they are being paid to promote for.

This creates hype by the gullible investors as they rush to get into the penny stock that they just got an email about and all the amazing, adrenaline rushing things they read about how it’s the next millionaire creating stock.

This sudden hype and increase in demand results in the penny stock’s price going up. Sometimes it can spike up several hundred percent in one day but the odds aren’t too great. Usually it will go up 20-100% depending on the surge in volume and demand.

As the price rises, the original share owners who paid for the promotions are selling off their overpriced shares to the gullible investors, cashing out for huge gains.

Once they have sold all of their shares there is no reason to continue paying promoters to hype the stock anymore so they stop and walk away with their new riches.

Meanwhile, the hype around the stock fades, people realize the newsletters, articles, and press releases were false and scams. The stock price starts tanking and a lot of investors scramble to exit their positions. For everyone who sells there is someone else buying. This means there are new buyers coming in late taking the fall and losing great sums of money as the stock price fades back to low levels.

Here are some graphs to show you the sudden spike due to hype and how it tumbles down once the hype fades away and people realize it was a scam.

pump and dump stock market

Below the graph you see a bar graph. This is the volume level meaning volume of shares traded. You can see the volume increases as more people see the stock promotion alerts and the hype builds.

In just a few weeks the stock triples its price from 40 cents to $1.20 before a sudden spike in sellers emerges, as seen by the volume bar that shoots up, and the stock price plummets.

A classic pump over a few weeks to rid of shares (dump) and then the promotions stop and price falls hard causing many to lose money.

Here’s another graph/example:

pump and dump

Overall summary, don’t fall for pump and dump scams.

Resist the urge to subscribe to penny stock alert websites.

It’s impossible to predict stock price movement so the odds of you buying before a spike are very little.

Also don’t fall for the common belief that if you buy a penny stock and hold it, that it will eventually have a spike in price and you can sell.

Again, most penny stocks are trading at cheap prices because the company is failing and heading towards bankruptcy so investors who buy penny stocks for the long term waiting for a spike are likely to see it go bankrupt and lose their investment.

Hope today’s post sheds some light on pump and dump scams and how they work.

To learn from successful Penny Stock Traders who have helped lots of people with their websites and training courses check out the following people:

You can also find Tim Sykes on Profitly, a website he started where traders can post their trades publicly and be verified so that other’s wanting to see your performance know they are true trades and not false success.

You’ll find a lot of penny stock traders are nothing but fake hype trying to pump their own stocks rather than actually teach others. Tim Gratani (Twitter: Kroyrunner89) and Tim Sykes are good people to follow, although you may be turned off by Tim Sykes ego. So you can’t say I didn’t warn you, but he is inspirational to thousands and has helped many people follow his strategies as well as his Tim Alerts program where he alerts people stocks to watch and stocks he’s entering and exiting possibly.

Oh, and I forgot to mention that both of the Tim’s took $2,500 and turned it into multiple millions. Smart people start with low risk and turn it into high reward. Angel investors throw small sums of money into tech companies expecting large 100x rewards. Their downside is the small money lost and upside is the 100x they make on their investment.

Read: How much should you have to start investing in stocks

Resources

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Be great today,

Nick Foy

P.S. Learn how to invest in stocks, not day trade here in my new eBook: The Book on Stock Market Investing: A Beginner’s Guide

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