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.