Self-styled stock research firms send out emails almost daily in hope of convincing their recipients to invest in exciting new businesses. Typically, these companies are close to developing cures for cancer or HIV, have discovered gold deposits, or have developed cutting-edge internet technology. While these opportunities might seem intriguing, many of these research firms are more interested in making money from selling stock to investors without any experience than they are about capitalizing new businesses. What is usually occurring is an effort to pump up a stock price through an intense marketing campaign so that schemer stock holdings can be dumped on new investors when the share price peaks. Hence the name, "pump and dump."
A pump and dump scheme is a form of stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements. The objective is to sell the cheaply purchased stock at a higher price by driving up the value via new client stock purchases. They are usually conducted with the aid of one or more small broker-dealers who cold-call small investors from lead-lists and use high pressure sales tactics. Oftentimes, the brokers engage in unauthorized trading and refuse to execute all orders to pump up the stock price. Once the operators of the scheme pump up the price and dump their overvalued shares, the price falls and investors lose their money. While fraudsters in the past relied on cold calls, the internet now offers a cheaper and easier way of reaching large numbers of potential investors.
Fortunately, investors can spot pump and dump schemes by asking themselves a series of simple questions. The following will help eliminate most stocks that do not have real business:
1) What is the current stock price?
Check the recent stock price by getting a quote on the internet. Most worthwhile stock prices trade at around $5 per share. If you are a conservative investor or not risk tolerant, rule out stocks trading below that level.
2) How has the stock traded recently?
Heavily promoted stocks often move from below 50 cents to above $1 or more in a short period of time. Rule out stocks that have consistently traded below 50 cents per share.
3) What are the company's annual revenues?
Use the internet to look up the company's income statement. Rule out companies that do not produce at least $50 million in revenue per year.
4) What are the quarterly revenues?
Use the internet to look up the company's quarterly income. Rule out companies that do not produce at least $10 million in revenue per quarter.
5) Is the company solvent?
Use the internet to look up the company's balance sheet. The liabilities exceed assets, the company is financially weak. Rule out any companies whose current liabilities exceed current assets.
6) Has there been a change in business?
Use the internet to look up the most recent Quarterly 10-Q or Annual 10-K report and read the Overview section. Rule out any company that has recently changed its business plan, i.e. from mining to technology.
Investors should still realize that passing any one of these question does not necessarily mean that they will make money. At the least, they will know they are considering a real company.
Have you suffered losses in a pump and dump scheme? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at firstname.lastname@example.org for answers to any of your questions about this blog post and/or any related matter.