What is it Called When a Broker Inflates Stock Prices?
When I worked as a stock broker, people often asked me if I had any hot
stock tips. To be sure, for a lot of us, there’s an allure to the
idea of acting on a hot tip and making a big profit before your friends
and neighbors are able to get in on the action. For some of us, it may
even be irresistible. The thing is, fraudsters know that a lot of investors
want to try to get in early on a good thing. That’s why you should
always be very cautious and exercise extreme care before acting on any
hot stock tip. It could turn out that this hot tip is actually nothing
more than an old fashioned pump and dump scheme.
Pump and dump schemes have been around for hundreds of years. They involve
stock promoters who artificially inflate the price of a stock through
false and misleading statements, creating a buying frenzy and pumping
up the price of a stock. Once the schemers sell their shares, the stock
price falls and the other investors lose their money.
Pump and dump schemes carry a number of warning signs. Schemers frequently
use email to lure people in. They also use social media sites, bulletin
boards, and chat rooms. Often, the schemers will claim to have inside
information about some development about the company. Subject lines and
short messages are designed to lure investors into buying the stock and
running up the price. Other signs include aggressive sales tactics and
guaranteed high returns.
You should be particularly wary if the promoter pitches the investment
as a limited time only opportunity, especially if the promoter claims
to base this recommendation on inside or confidential information. Before
investing in a company based on a stock promotion, remember that the promoter
may be trying to get you to buy into the hype in order to sell his shares
at your expense.
As one regulator put it, if you’re getting an unsolicited email about
some stock that you’ve never heard of, the smartest play is the
easiest play. Just hit the delete key. Thank you very much.