Pump and Dumps: An Inside Look By Daryn P. Fleming Published by OTCBB News Network
You have read about them on message boards. You have heard investors whine about them on the chat forums. For those of you who hate to ask questions, we will ask this one for you. What in the world is a pump and dump? A pump and dump is essentially defined as an organized advertising campaign whereby a stock is heavily promoted in the investment community only for the purpose of selling shares. The bottom line is that a successful pump and dump campaign will result in a stock price pumped up to high heaven so that insiders or people close to the company can sell shares at a profit and raise money for themselves or the company. The problem is that in the end the stock price will come crashing down and someone will be left holding the bag. Who are the perpetrators?
Anyone can organize a pump and dump campaign. Sometimes small investors who buy cheap shares when the stock is unknown organize them. Other times they are organized by investment newsletters who were paid by the companies to promote the stock to their readers. We would venture to say that a vast majority of these campaigns are run by people close to the companies who finance the companies through purchasing discounted stock. These investors are looking to cash out. They will be unable to do so unless the stock has enough liquidity (trades frequently) and the price holds up.
Here is a possible scenario: Stock ABCD has been a publicly traded company for years. The stock price has been beaten down badly. The company has little or no revenues and no earnings. An investor who has been accumulating a large block of stock is tired of watching his net worth decrease as the stock goes down. So he develops a plan. He will promote the stock and try to get other investors to buy it. If the plan works he will be able to get his investment back and actually make a huge profit. So he gets started by first telling his friends and family about the stock and how it will be the next Microsoft. He takes it to the next level by posting positive messages about the company all over the Internet, on message boards and the like. He happens to know some people at a powerful investment newsletter. He persuades (or pays) them to tell readers about the stock. This newsletter has a lot of influence and is actually able to convince other newsletters to feature the stock. By the time the information is plastered all over the Internet, the stock actually explodes, as phenomenal buying volume comes in. The stock goes up for several days, as a bandwagon effect take hold (more and more investors buying the stock because they see it going up). Eventually, the stock reaches its high and the buying stops. Then the stock comes crashing down, usually back to the level it was at before the pump and dump campaign began.
So is the pump and dump a terrible, evil thing that investors should stay away from? Not if they want to make tons of money fast. A pump and dump is both a blessing and a curse. For those who know how to play the “game” it can be a blessing. For an amateur investor who knows nothing about the business, it can be a curse, as losses will be heavy. Amateurs shouldn’t be involved in the OTCBB anyway, as the market is best suited for speculators (investors who are willing to take a calculated risk and are prepared to lose the entire investment) .
Here are some tips for playing the game:
1) Subscribe to one or more investment newsletters. These letters often reveal stocks that are beginning promotional campaigns. Don’t chase stocks that have been listed on the newsletter for a while. Chances are, the stock has already had a run. You have to get in at the lowest possible level when the stock is first mentioned.
2) Do your own research. Check the message boards and see what is being said about the stock. Are there only a few messages? This is a telltale sign that you may have found a good one, as most stocks that are unheard of will have little or no following. A good service is Raging Bull (www.ragingbull.com). Check the stock chart like that found at www.bigcharts.com. Make sure you are buying the stock at the lowest possible level.
3) If you get lucky enough to find a pump and dump don’t get greedy. It is very easy to double your money in penny stocks. Pump and dumps tend to move very quickly. That means they can move against you. So the longer you hold on the more likely you will lose when the stock goes down again. If you can make a few bucks take the money and
run. If you are just getting your feet wet with the OTCBB, don’t put too much money in. $500 is plenty of money for a beginner. Even if you are an expert investor I wouldn’t put in any more than $10,000 maximum. The problem with huge blocks of stock is that they are harder to sell than smaller lots.
4) Don’t fall in love with a stock. The reality is most OTCBB stocks trade on strictly supply and demand of the stock. The good stories told by these companies help sell stock but don’t bring in real revenues to the companies. Even those rare stocks that do have revenues or earnings will not trade according to the same formulas as stocks listed on larger exchanges like NASDAQ or NYSE. The reality is it doesn’t matter if a company sells apples and oranges or it builds fiber optic telecommunication networks. If it tells its story effectively, and packages and promotes its stock in an organized campaign that brings in more buying than people who are selling at the momentt, the stock price can go through the roof.
A pump and dump is essentially the proverbial glass of water viewed as half empty or half full. The concept has its promoters and detractors. If you can find a good pump and dump you can make a killing. If you get in too late you could lose all your money as the stock plummets. A pump and dump is not for everyone. Only seasoned investors should attempt to play the game. If you are skilled at it you can make a fortune. If you are an amateur you could lose every penny. Let the buyer beware.
otcbbnn.com |
