What Exactly Is A Penny Stock ‘Pump and Dump’?

| September 14, 2011 | 0 Comments

stock crashingLook, there’s no denying that penny stocks can be extremely lucrative… if you know what you’re doing.

Unfortunately, most individual investors don’t have a clue how the game works.

I’ve seen it time and again.

They’ll get some hot tip from a free email list.

They’ll take ALL their money and buy this one stock without doing any research, just as it’s starting to spike in volume.

Then… BAM!

Right when they buy in, the stock starts to plummet rapidly.

The “investor” ends up holding it for a few days or weeks, finally selling at a HUGE loss.

These poor investors will usually repeat the same mistake a few more times before they’re completely knocked out of the market—and left with a brokerage account balance of $7.52 or something like that.

It’s sad.  And makes me a little angry!

But the good news is, this scenario is completely avoidable…

Before you learn how to pull steady profits from penny stocks, you’ve got to learn what to avoid!

If you ignore my advice and base your penny stock investment decisions on penny stock pump and dumps, you’re virtually GUARANTEED TO GO BROKE!

Now, as my way of giving back to individual investors like you, here’s how these pernicious ‘pump and dumps’ work…

It starts with some guy sitting in his underwear in his mom’s basement who decides to start building a list of people who want “free” penny stock picks (once they get successful with this they may move out of their mom’s basement and rent office space to look like a ‘legitimate’ company).

Now he usually doesn’t offer a free report or a legitimate newsletter in exchange for your email address.  He just promises to send you “hot stock picks” when he “finds them”.

Once he’s got a list of suckers (I mean investors) built up, he approaches 3rd party investors in or owners of worthless companies.

These people then pay our shirtless hero to send his email list a “buy” recommendation on their worthless company.

Once the email is sent out, the clueless investors on the list begin buying the shares of the bogus stock.

The stock usually skyrockets for a few hours or days (because it has no volume).

As it’s skyrocketing, the people perpetuating this scam begin selling their own shares.

That’s right, while they’re telling you how great this company is and why you should buy it, they’re secretly selling their shares on the open market!

Once they’ve dumped all their shares, the volume dries up.

All the poor suckers who bought during this frenzy now try to sell their shares…

Problem is, there’s no one left to buy.

So what happens next is the stock begins to drop VERY FAST.

In fact it drops so fast, and so much, that unsuspecting investors usually end up losing their collective ass!

In a mere matter of hours or days, these folks lose a great deal of money.  And the only people who’ve made money are the guy with the list and the investors who paid him to pump the stock.

If you doubt ANY of what I’m saying, take a look at the chart of a “pump and dump” stock.  You’ll see it trading for nothing, spike huge, and then trade for nothing again.

I’ve seen this same scenario play out hundreds of times…

Now that you understand the game, I know what you’re probably thinking.

I’ll buy the worthless company and sell it before it falls.

All I can say to that is “good luck”…

The problem is you have no idea when the bottom’s going to fall out!  You may get away with it for small profits once or twice… but eventually you’re going to get whacked.

And when that happens, you’re going to lose all your profits and then some.

It’s like playing Russian Roulette until the chamber’s empty!

To avoid becoming one of the poor unfortunate souls who gets taken by this scam, realize there are two simple things you can do to protect yourself…

First, when you sign-up for a free email newsletter (there ARE some good ones out there… like this one for example!) be sure they actually send you good content.

It should be pertinent, easy-to-read, unbiased information about the economy, the markets, and investing.  It should also be delivered on a regular basis.

The pump and dumpers don’t have the time or staff to produce high-quality investment information.  All they do is write-up BS reports on whatever stock they’re pumping.

Be sure to avoid anything that just comes out every “once-in-awhile” and only touts one particular stock.

That’s a sure sign of a pump-and-dump.

Now here’s the second way you can identify this scam…

The unsavory characters engaged in this are now required by law to disclose whether or not they’ve been paid to tout a stock.

You can find this “disclosure” or “disclaimer” at the bottom of every email they send out, or at least at the bottom of their website.

Here’s a real-life example so you know what to look for:


Are you really going to trust a company saying right on their website that they have a conflict of interest with you and they’re not objective?  THAT’S LUDICROUS!

If you think about it, it’s pretty obvious what’s going on.  If someone is paying these guys say $15,000 to pump a stock, what do you think they’re going to say about that stock?

You guessed it, nothing but wonderful things!

It’s really a joke but infortunately, many naïve investors fall for it.

The bottom line is this:  investing in penny stocks that are being ‘pumped and dumped’ is a very dangerous strategy that will decimate most investors.

With that said, there is a way to profit from these shananigans, but I don’t have time today to go into it.  I’ll get back to you soon with that information… in the mean time STAY AWAY FROM PUMP AND DUMPS!

Editor’s Note:  If you’re looking for legitimate penny stocks to invest in, check out Gordon Lewis’ Penny Stock All-Stars.  It’s one of the rare newsletters out there that avoids pump and dumps and actually recommends REAL investment opportunities in penny stocks.  Click here to check it out.

Yours in profit,

Gordon Lewis

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Category: Investing in Penny Stocks, Penny Stock Tips, Pump & Dump Alerts

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