Pump and dump schemes promise extraordinary returns on a seemingly low-risk investment. They can be spotted when a stock with normally low trading volume has a sudden increase in price.
Pump and dump schemes often start with an investor receiving a promotional email or telephone call touting an incredible opportunity to buy a newly discovered or overlooked low-priced stock. They may claim to have insider information. The scammer tells you this stock has incredible potential and you are given a rare chance to get in on the ground floor. What the scammers do not tell you is that they, the promoters, already own a large quantity of this stock which they bought at a very low price. They buy and sell the stock among themselves to give the impression that there is a high demand for this stock. As the stock is promoted, more and more investors buy shares. The value of the stock is shooting up and you do not want to miss out (FOMO).
Once the shares hit a price the promoters think is the maximum it will achieve, they sell the shares they accumulated at a much lower price. This causes the value of the stock to plummet, leaving the unsuspecting investors with worthless stock and big losses.
To avoid this type of Ponzi scheme, look for stocks that show a solid long-term performance and current, accurate financial statements. Don’t buy stocks where there is insufficient reliable information available. Rumors are not a good source of investment advice. Be wary of stocks that have a low trading volume. They are easy to manipulate and often difficult to sell. Always research what you hear and read.