How is this Scam Perpetuated?

There are three ways that modern scammers carry out this scam using modern technology.

The first way is by spamming thousands of people with “stock tips”. The hope is that enough people will buy the stocks, forcing up the price.

The second way (closely related to the first way) is by posting to online trading forums. A lot of people lurk on these forums, looking for advice from other people. The scammer posts a convincing statement that a stock is about to increase rapidly in price, and waits for other people to follow the lead.

The third way is the most clever of them all. I am amazed by the ingenuity of it. The scammer says that they have a special computer program that can pick penny stocks that are about to increase in value. They send out a paid newsletter with the buys for people to follow. After a while, they offer a copy of the program for sale, which simply remotely queries a database for the stocks that have already been selected for pumping – there is no actual stock picking logic.

So in addition to getting money from the newsletter and sale of the program, they also get the profits from pumping selected stocks.

This particular scam states that the program was developed by an ex Goldman Sachs trader. Of course, this is a lie. Goldman Sachs is not about to trade penny stocks.

The advertisement shows a picture of a candlestick chart and states that it looks like something that NASA would make. The target audience is obviously those who are unfamiliar with trading.

If you had a program that could accurately pick stocks, would you sell the results for $47, or the program for $97? I have some software that picks changes in trends, and I am not selling it for any price. Also, the program for sale is a black box – you should always be very careful of trading with any program that doesn’t have disclosed logic.

Conclusion

The pump and dump scam not only loses you money, but is also illegal. There are no short cuts to stock trading profits, no special newsletters or black box computer programs that will help you suddenly acquire riches.

The antidote to being scammed is knowledge of the market, and you can gain this by reading widely and educating yourself, rather than putting your trust in untrustworthy scammers who make their money, not through market mastery but by ripping off others.

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Tags: penny stocks, pump and dump, scam, stock scam

This entry was posted on Sunday, October 12th, 2008 at 5:16 am and is filed under Scams to Avoid. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.