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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:
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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. |
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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. |
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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 claims. |
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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. |
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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. |
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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? |
For more information on how to use the Internet to invest wisely and avoid
fraud, be sure to visit our Internet and
Online Trading web page. There you'll find a vast array of tips,
including Internet Fraud: How to Avoid Internet
Investment Scams. |
