How to Avoid Pump and Dump Schemes

What exactly does pump and dump mean? A pump and dump scheme takes place when a person or a group of people decide to try to boost the price of a stock through a recommendation based on false or misleading statements. The people who start this scheme have already bought a position in the stock, so they proceed to hype the stock in any manner possible, which typically leads to higher prices. After the stock is at higher prices they then sell their stock and make a nice profit off of their tidy little scam. Guess who ends up losing in this scenario? Yes indeed, the average individual investor is the loser in these schemes.

Pump and dump scams often take place in penny stocks or on stocks that have a very low average trading volume. This is because it is much easier for someone to move the price of a stock with a low float and little average trading volumes. A pump and dump scheme in a stock like Microsoft would likely have no effect on the price of the stock, but the same scam on a penny stock could move the stock by 100% or more in a couple of days.

The single best way to avoid pump and dump scams is to only use stock research from well-known investment research companies. When you start using things like stock message boards or newsletters that are sent to your mailing address, you are just asking for trouble. Ask yourself why someone would want to go onto a message board or pay to send out newsletters pumping a certain stock. The clear answer is, they are wanting to make a mint for themselves. They don't care about you, rather they simply want to hype the stock and then sell it off after you buy in.

A reputable investment research company will never use over the top words like "guaranteed to double" or anything outrageous. Watch for strong language that makes the stock sound too good to be true and if you start seeing that, consider yourself warned that it is likely a pump and dump scam. Understand that investing is just like everything else, if it looks too good to be true then it probably is. Finding winning stocks is all about solid research and hard work, not following the call of someone who has only their best interest in mind!