Scammers have probably been around for as long as money has been in existence. The financial markets are where some of the most high-profile scams have been pulled off, from the eponymous Ponzi scheme in the 1920s to Madoff’s $64.8 billion (USD) fraud. In this issue, I will discuss the pump and dump scam in stock markets, and how to spot and avoid it.
Scammers employing this scheme will buy up relatively obscure stocks and drive up their prices. They will then hype up these stocks and dump them on their victims. Often, scammers will strike up conversations with their victims on social media or messaging apps by pretending to have mistaken them for somebody else. They may spend weeks or even months building up their victims’ trust before even talking about stocks. Once they do, however, they employ high-pressure sales tactics to force their victims into buying the pumped-up stocks.
There are a few red flags that can help you to spot a pump and dump. The first is receiving an unsolicited tip from someone you do not know. Although this may seem obvious, be aware that scammers will attempt to gain your trust, and some of them have become incredibly good at this. They are also really good at making their victims believe that they need to act fast or they will lose the opportunity.
The second red flag is that the stock being pumped will usually be that of a small and obscure company, with very few shares listed. It is much easier to manipulate shares of a small company than shares of, say, Microsoft. If you receive a stock tip for a company you have never heard of, look up its price history. Chances are that you will notice a sudden multi-fold spike in its share price. Note when the share price started moving, and do a Google search for news about the company published around the same time that could explain the price movement. If you cannot find anything significant, then alarm bells should start going off, if they haven’t already.
In general, the age-old adage that “if it’s too good to be true, then it probably isn’t” applies almost without exception when it comes to investments. If you find yourself thinking that something is an unbelievable opportunity, then maybe don’t believe it. Always do your own research and talk to someone you trust, no matter how urgently you think you have to act on a tip.