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Tips for Avoiding Stock Scams
on the Internet
One of the most common Internet frauds involves the classic "pump and dump"
scheme. Here's how it works: A company's web site may feature a glowing press
release about its financial health or some new product or innovation.
Newsletters that purport to offer unbiased recommendations may suddenly tout the
company as the latest "hot" stock. Messages in chat rooms and bulletin board
postings may urge you to buy the stock quickly or to sell before the price goes
down. Or you may even hear the company mentioned by a radio or TV analyst.
Unwitting investors then purchase the stock in droves, creating high demand
and pumping up the price. But when the fraudsters behind the scheme sell their
shares at the peak and stop hyping the stock, the price plummets, and investors
lose their money.
Fraudsters frequently use this ploy with small, thinly traded companies
because it's easier to manipulate a stock when there's little or no information
available about the company. To steer clear of potential scams, always
investigate before you invest:
Consider the Source
When you see an offer on the Internet, assume it is a scam, until you can
prove through your own research that it is legitimate. And remember that the
people touting the stock may well be insiders of the company or paid promoters
who stand to profit handsomely if you trade.
Find Out Where the Stock Trades
Many of the smallest and most thinly traded stocks cannot meet the
listing requirements of the Nasdaq Stock Market or a national exchange, such
as the New York Stock Exchange. Instead they trade in the "over-the-counter"
market and are quoted on OTC systems, such as the OTC Bulletin Board or the
Pink Sheets. Stocks that trade in the OTC market are generally among the most
risky and most susceptible to manipulation.
Independently Verify Claims
It's easy for a company or its promoters to make grandiose claims about
new product developments, lucrative contracts, or the company's financial
health. But before you invest, make sure you've independently verified those
Research the Opportunity
Always ask for — and carefully read — the prospectus or current financial
statements. Check the SEC's
EDGAR database to see whether the investment is registered. Some smaller
companies don't have to register their securities offerings with the SEC, so
always check with your
state securities regulator, too.
Watch Out for High-Pressure Pitches
Beware of promoters who pressure you to buy before you have a chance to
think about and fully investigate the so-called "opportunity." Don't fall for
the line that you'll lose out on a "once-in-a-lifetime" chance to make big
money if you don't act quickly.
Always Be Skeptical
Whenever someone you don't know offers you a hot stock tip, ask yourself:
Why me? Why is this stranger giving me this tip? How might he or she
benefit if I trade?