Tell me more ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.
up vote 9 down vote favorite

What are the indicators that a stock is currently being pumped for a later dump? If one were watching the market what would they need to look for in order to identify a stock as a victim of pump and dump?

share|improve this question
1  
Interesting. I am also curious how often pump and dump occurs, or if it is mostly a movie plot. – MrChrister♦ Dec 18 '12 at 23:33
1  
@MrChrister I'm under the impression it happens a fair amount with penny stocks, but I don't have any real stats to back that up. – C. Ross♦ Dec 19 '12 at 1:40
@MrChrister: I used to get a lot of spam that was obviously part of a pump-and-dump scheme. I don't know if they have quit sending it or the filters have gotten good enough that it's not getting through anymore. – Loren Pechtel Dec 19 '12 at 21:09

1 Answer

up vote 10 down vote

Pump-and-dump scams are indeed very real, but the scale of a single scam isn't anywhere near the type of heist you see in movies like Trading Places. Usually, the scammer will buy a few hundred dollars of a penny stock for some obscure small business, then they'll spam every address they have with advice that this business is about to announce a huge breakthrough that will make it the next Microsoft. A few dozen people bite, buy up a few thousand shares each (remember the shares are trading for pennies), then when the rise in demand pushes up the price enough for the scammer to make a decent buck, he cashes out, the price falls based on the resulting glut of stock, and the victims lose their money.

Thus a few red flags shake out that would-be investors should be wary of:

  • You've never heard of the company. Not a huge red flag by itself, but a little research into the company, where they are, what they do, etc is in order.
  • Total market cap of the stock will be in the high six to low seven figures; enough that one guy couldn't buy all the shares (or would be legally required to announce an attempt to do so, with a "cool-off" period to let the market absorb that news), but a thousand unwitting suckers can make a dent. Again, not necessarily a problem; lots of publicly-traded companies get along just fine on a couple million in capitalization, but be very wary of a sudden surge; look for real news triggering the uptick.
  • Pump-and dumps are often cyclical; they'll try the same scheme many times on the same stock before people get tired of losing on the downtick. If you've seen the stock move up and down significantly many times over the course of a week or two, especially if the moves don't match the market, stay away; even if it's not being manipulated it's way too volatile for you to realize a reliable gain.
  • Pump-and-dumps almost always involve unsolicited e-mail alerting potential victims to this "opportunity of the century". This is a HUGE red flag; check your spam folder for anything recently received regarding this stock. If anyone you don't know personally is telling you to buy this stock, or if they're using language the ostensible sender wouldn't ever use, steer clear.
share|improve this answer
3  
Am I right in assuming that by the time the spam emails start arriving it is too late to be on the winning side of a pump and dump? – opensourcechris Dec 19 '12 at 1:59
1  
@opensourcechris - Yes. But even if you were the first, the risk is so high that I (and I think most) would advise against it. You'd have to buy and sell on time, and you would be missing important information, which is when the spam goes out. Capitalism works on transparency, scams and rip-offs do not. – MrChrister♦ Dec 19 '12 at 2:40
2  
May I add that you should never invest in companies whose business model you don't understand? Each era has it's own buzzwords. Nano, quantum, graphene, internet, information superhighway. If you can't figure out what it is they actually do and why anyone would want to pay for that, stay away. – Lagerbaer Jun 12 at 3:51
@Lagerbaer - I understand the sentiment, but we are centuries beyond the point at which a single human could know the sum total of human scientific knowledge. Sometimes even multi-billion-dollar blue chips don't understand the whys and hows of their own NBT. Big Pharma's an example. The sentiment, though, is valid; do your own research into the company, what it's actually doing, how it plans to market it, etc. – KeithS Jun 12 at 16:54

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.