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beware of pump and dumps

There's easy money to be made investing in the stock market.

Easy money if you are a scam artist, crook or just highly unethical, that is.

When the stock market is strong, it invites the purveyors of schemes designed to make you poor and them rich to push their wares even harder.

A strong stock market tempts people who know nothing of investing, but want to get in on the action and there are always crooks willing to help them invest in the latest hot stock.

Unfortunately, the deals sound so great that many unsuspecting novices to investing in the stock market fall prey to the schemes.

Fear and greed are the two most powerful emotional motivators. Both drive investors to make decisions that are foolish.

When the market is in one of its down cycles, fear drives investors out of the market as prices are dropping. When the market rebounds they buy back in at prices often higher than what the got as they exited the market. Thus the famous sell low, buy high strategy - not a winner.

Greed drives people to believe things that they might not under less emotional circumstances.

When you are offered or see ads for "millionaire secrets" or "expert's strategy" or some other catch phrase that implies you will receive knowledge others don't have, that is the usual sign that what you receive will be more enticements to "upgrade to the pro platform" and so on.

Your e-mail inbox may be stuffed with the same message from dozens of people you don't know. They are all touting the same penny stock, which tells you this may be a classic "pump and dump."

Here's how a "pump and dump" scam works. The crooks buy a big chunk of stock in a company, often a penny stock where they can get a lot of shares cheap. In most cases, the company is not a participant in the scheme.

They may use several accomplices so no one person attracts attention with their purchases.

The crooks then start an aggressive campaign of pumping up the stock with stories about what a great business it is and how it is about to make a big announcement. They predict the stock will make huge gains in the next few days.

You are encouraged to buy now while the price is right.

If the crooks have done a good job of pumping the stock, people will start buying it and the price will begin to rise.

As the price starts to rise, the crooks will double their efforts of pumping the stock, pointing out that the price is going up, but there is still time to make a killing.

The crooks keep pumping the stock - even to the point of issuing false press releases or analysts comments to hike the price even higher.

When they feel they have pushed the price as high as it is going to go and company officials are publicly expressing concern about the rising price of their stock, the crooks dump their shares for a fat profit.

This unloading of a large block of stock sends the price plummeting and other shareholders, seeking the price falling, sell also. The stock plunges, sometimes lower than before the crooks took an interest.

The crooks walk away with a fat profit, the shareholders who bought on their advice are burned and the company gets a black mark it probably didn't deserve.

You can avoid a "pump and dump" scam by:

Never buy on the recommendation of someone you don't know
Promises of quick gains are rarely true
Big announcements, new products, and so on are a give away that you are being hyped

If it seems to good to be true, the odds are very high it is not true.

CorporateScreeners

most directors are insiders robbers

Sunday, May 30, 2010

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