Posted on 04 June 2012.
Pump and dump penny stocksare an unfortunate side effect of a market that experiences wide fluctuations. Though the process is illegal, it is still very common. As internet stock tips become more relied upon, it has become easier for certain scammers to attempt this common type of fraud. Some may consider the process harmless, pumping and dumping can cause many investors to sustain major losses. If one takes the time to understand how the scheme works, it becomes easier to understand how it can cause major harm.
It may be wise to consider what it means to pump and dump penny stocks. The so-called “pump and dump” name is really little more than a clever euphemism for defrauding other traders so that one can make a profit. To pump and dump penny stocks, one simply has to have a bit of influence. The trader in question will spend time promoting the stock, often leaking falsified tips that the stock will soon become more valuable. Once other traders have driven up the price, the initial instigator will “dump” his or her stocks, reaping a massive profit. The stock will soon return to its reasonable value, and those who followed the false information will sustain losses.
It is always wise to be cautious when investing. You should make sure that any stock in which you invest is growing for legitimate reasons, and you should be aware that a penny stock that grows without reason might be part of such a scheme. This sort of caution may cause you to miss out on the occasional power investment, but it will also help you to avoid the losses associated with pump and dump penny stocks.
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