Lately, many retail investors/speculators are excited about the penny stocks. Many of these penny stocks are lost-making for quite awhile and out of the blue catch the attention of the market. Well, most of these penny stocks actually turn up to be just candidates of pump and dump counters. Read below carefully so that you understand this issue better.
You may have seen a stock pump and dump underway the last couple of months in the local stock market for any number of small cap companies.
The whole reason behind a stock pump and dump is for the stock pumpers to profit.
These pumpers – some person, or some group, buys shares in a company.
They promote this stock to other investors.
The share price rise due to the other investors buying the stock and the pumpers sell their shares at a premium to other investors.
How To Spot A Stock Pump and Dump
It is getting more difficult to spot a stock pump and dump as the pumper gets more sophisticated and cleverer over time.
But usually, the best way to tell the difference between a legitimate promotion of a stock and a stock pump and dump is by looking at the source of the stock promoter. If you’re reading the good news from a nameless author – chances are, it’s a stock pump and dump.
If the update or alert contains as many “probable” and “projections” points as hard facts about the company – chances are, it’s a stock pump and dump.
Finally, if you’re being promised hundreds of percent gains if you just hold out through another day or a week or two, – or better yet, asked to double down when the stock drop – chances are, it’s a stock pump and dump.
5 Steps In A Stock Pump and Dump
Step 1 – The Bait
This is the first step where the pumpers share the “good news” on a stock they bought earlier.
They spread the good news via personal emails lists, stock forums, money magazines, social media, words of mouth (via broker) or even getting the newspaper to write an article.
During The Bait step, popular sentences you always hear -
“The company is negotiating some hundreds of millions ringgit project”
“The stock is undervalued and have huge upside potential”
“The stock is dirt cheap … you don’t want to miss out when the ‘good news” come out …. soon!”
“The stock is 20 cents with the target price (TP) of $1.20 …that’s a 500% gain!
Could this possibly be true?
Step 2 – The Rally
During this rally phase, the stock will start moving aggressively with daily volumes 5 to 10 times higher than when the first “good news” posted as the bait was released.
And every day, for the next week, next two weeks, next month, you’ll see those same subject lines with the same calls to action: Buy, buy, buy…good news coming soon! Target price $1.50 …. jump in now!
And if you’ve already bought, the goal is to get you to buy more.
Step 3 – The Sell Off
The stock pumper generally refer to this as a “short-term profit taking.” In other words, they’re blaming a group of investors taking some profits who are driving down the stock prices.
However, the more likely culprit here is that all those pumpers who bought up million-plus share positions early on and are starting to dump their shares onto a very artificial market.
Unfortunately for the other hapless investors, most of those shares were sales executed by these pumpers as the stock plummeted below the price where most of them bought in.
Step 4 – The Rebound
Eventually, with enough work, enough spam, and enough new names pouring in thinking they are getting a bargain, the selling tide abates and the stock moves up again.
During The Rebound step, popular sentences you always hear -
“The stock is a bargain at this price, buy now before it move again!”
“The stock is technically oversold and ready to resume its rally!”
“I just bought 300 lots at this cheap price.Getting ready for the bounce.”
In the next couple of days, the price does indeed recover, maybe as much as double from its sell off lows.
Step 5 – The Demise
In this stage, the stock slowly drop and keep dropping for weeks and months till all the selling dry up.
There is no more “good news” or is usually the case, no news on the stock at all.
All the stock pumpers have left the stock and they are promoting a new hot stock to new investors.
All we know, based on the pumper’s subject line, was that any chance for more gains on the stock pretty much went up in smoke the moment they came out with a new stock pick.
Conclusion
Legitimately promoting stocks is accepted, ethical, and if done right, profitable for everyone – investors and owners alike.
However, an evil cousin of legitimate promoting is a stock pump and dump.
Designed to be little more than a short-term artificial boost to the share price of a stock, stock pump and dump generally last only as long as it takes for those who financed the pump to sell their shares on their unsuspecting fellow investors.
Don’t be fooled by these stock pump and dump scams in the stock market and learn how to invest wisely on stocks.
