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.