Penny stocks are a great way to get in on the ground floor of an exciting new company.
You can buy shares for as little as $0.0001, and if you’re lucky, your investment could be worth 10x that amount or more.
But there’s a catch – they’re risky investments. Losing all your money is easy if you don’t know what you’re doing.
Many scammers lure people with the promise of easy money by claiming that their stock will go up overnight.
This is called “pump-and-dump” – when something worthless becomes worth a lot of money.
And when it does, the scammers will sell their shares and make a profit while you’re left with nothing but regret.
Promoters who are behind “pump-and-dump” schemes usually send out messages or advertise on the internet (Twitter, Discord chat channel groups, etc.) to tell people about how specific stocks will go up overnight, or they’ll do this by themselves, without telling anyone else.
The pump-and-dump scam is a tactic that involves artificially inflating the price of an owned security through false and misleading positive statements.
For a novice investor, it’s equivalent to flushing cash down the toilet. If you don’t know what you’re doing, stick with safe investments.
Penny stocks are fun for seasoned investors who know how this game is played and can read between the lines of a company prospectus. But even for them, the losses can be devastating.
Warning: Never invest in anything you don’t know about or understand completely; never buy something because someone tells you it’s going to go up and make a lot of money fast.
You’ll end up with nothing but regret if your investment tanks.
Many conditions make an investment risky, and if you don’t know what they are, then it’s best to stay away from the pump and dump penny stocks in general.
What is a Pump and Dump Stock
Typically, these stocks have a high initial jump and decreased market value.
Pump and Dump stocks involve artificially inflating the price of an owned security through false and misleading positive statements to sell the cheaply purchased shares at a higher price.
This is often done anonymously or “pumping” up a specific company’s hype.
Investors who buy into these claims are “dumped” on when the value plummets with no warning.
How to Spot a Pump and Dump
- The definition of “pump and dump stocks” varies, but most are an entity that lives on the over-the-counter bulletin board (OTCBB).
- These are stocks under a dollar or one cent that do not provide as much transparency into their financial health.
- Pump and dump schemes are often viewed as a form of gambling rather than actual investing.
Penny stocks are highly volatile
Penny stocks are a highly volatile investment. If you’re looking for a safe and secure way to grow your wealth, penny stocks may not be the answer.
Penny stocks are low-priced publicly traded companies that often move up or down by 10% or more in one day.
They can be great for traders who know what they are doing, but the average investor should stay away.
Do Pump and Dump Investment Schemes Still Happen Today
Yes, they do. While there are plenty of warnings about the dangers and illegality of pumping stocks, pump and dump investments still happen today.
It’s essential to recognize the signs of a pump and dump scheme to fall victim.
After all, it would be best if you were doing your due diligence as an investor when looking at any stock.
How Do You Avoid Pump and Dump Penny Stocks?
Stay Away from Stock Tips
- One way to avoid pump and dump penny stocks is by staying away from stock tips. Stock tips are often scams where someone tries to convince you that they know what the next best thing in the market will be so that you buy their shares. These people make a profit when they sell and “dump” as you buy.
Avoid Penny Stocks That Show Unusual Volume Activity
- Another way to avoid pump and dump penny stocks is by avoiding penny stocks that show unusual volume activity. This can be confusing because there are some legitimate reasons for a stock to have a high trading volume, including being the subject of positive news. But if something about the volume doesn’t seem right, then it is best to avoid that stock.
Be Aware of “Hot Penny Stocks” and Monitor Them Closely
- Be aware of hot penny stocks and monitoring them closely as they become more popular. Hot penny stocks are stocks that start to gain momentum and attract a lot of attention, but this popularity can be their downfall because they become vulnerable to pump and dump scams.
Never Buy Penny Stocks from an Unknown or Untrusted Source
- Another way to avoid pump and dump penny stock is by never buying penny stocks from an unknown or untrusted source. This includes anyone that you do not know, as well as any websites where the information is unclear and difficult to find without a lot of effort.
Watch Out for Conflicts of Interest
- Watching out for conflicts of interest. This is when someone who owns shares in a company suggests that you buy those same shares, and they will profit from your purchase.
- Researching before buying shares can help avoid pump and dump penny stock scams because it will reveal any red flags. You should research the company’s products, finances and management team to make sure that it looks like a legitimate investment for you before buying shares.
- Avoiding stocks with suspiciously small amounts of shares (float). The number of shares that a company has can indicate how valuable it will be, which means these companies are often targets for pump and dumps because they have extremely low floats.
- Pumpers may use this to their advantage because low float stocks increase quickly with less share supply when pumped on fake good news.
Avoid Penny Stocks with Low Volume
- Another way to avoid pump and dump penny stock scams is by avoiding stocks with low volume. This is because it means that fewer people are buying, which can be a red flag for an impending crash.
- You should also look out for sudden spikes in trading volumes without any news or other changes related to the company’s value before going forward with the purchase.
The penny stock market is a risky way to invest your money.
In the penny stock world, it’s easy for an investor to think that they are getting a great deal on cheap stocks with high potential value because of their low price.
However, many risks are associated with penny stocks, and investing in penny stocks can be too good of a deal if you don’t know what you’re doing.
Not all penny stock investing is terrible. However, you need to be well educated and understand how to trade, which comes with years of experience and study time.
The penny stock market is a popular investment opportunity for many people.
If you are looking to buy penny stocks, keep this cautionary advice in mind: “If it’s too good to be true, it probably is.”
Scams have preyed on penny stock investors because of their desperation. Always research before investing.
The stock market is a volatile place to invest your money.
Although there are some days where you can make an impressive return, these occasions are rare and unpredictable.
Most people who invest in the stock market expect to wait months or years before seeing any significant investment return.
It’s best not to count on getting a significant return within just one afternoon of trading – it’s unlikely that will happen.
The best investment strategy is to do your research. I know it sounds like a lot of work, but you can’t expect someone else to tell you what to do with your money.
The world is full of people who will try and get in the way of your success for their gain.
Stay on top of things by reading up on the latest trends in investing so that you can make an informed decision about where to put your money.
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