If you’ve heard of the term “penny stocks” in the trading world, then you’ve probably heard of pump and dump schemes too. Though terms like this can be confusing, we’re here to help you understand what they mean and how they should affect your investing strategy. The first thing you need to know is that a penny stock isn’t actually a share you can buy for a penny. Instead, these shares are low-cost securities available for $5 or less, according to the securities and exchange commission. These low-cost investments are highly attractive for a lot of investors because they give you an opportunity to potentially get in on the ground floor of a growing business. Though there’s no guarantee that the shares you buy will be valuable, you can learn more about trading penny stocks with this video below:
As with any investment, you’ll need to be taking a risk with penny stocks – but that doesn’t mean that you should get into dangerous situations or set yourself up to be scammed. With that in mind, it’s important to understand what “pump and dump” schemes look like.
What is a Pump and Dump Scheme?
Many people see penny stocks and shares as a risky investment. That’s because a lot of these low-cost securities have been sold by companies outside of the regulated stock exchanges, on over-the-counter environments instead. Because these spaces aren’t regulated, the chances of you becoming a victim of a scam are increased significantly. For instance, many penny stocks have been known to be the source of pump and dump schemes over the years.
Pump and dump scams are what happens when investors buy a lot of stock from a low-cost share, and then use malicious tactics to convince people to push the value of the stock up. These people then suddenly turn around and dump all of those shares onto an investor, complete with the over-hyped price. The investor ends up paying a lot for stocks that aren’t worth much, and it’s impossible for them to unload those securities without taking a considerable loss.
Usually, you’ll find people attempting to drive pump and dump schemes on trading forums by telling people about a “hot tip” they have about a new up and coming stock. If anyone ever tries to push you to purchase a stock, you should always be suspicious.
Be Cautious with your Stocks
The good news is that there are ways you can make penny stock trading a lot safer. For instance, sticking to the securities that you find on regulated exchanges is always a good first step. There’s no need to trade on over-the-counter exchanges when you can find low-cost shares just about anywhere.
Additionally, if anything ever sounds too good to be true, remember that it probably is. You should always do your own research into any investment, and make sure that you never take the tips that someone else gives you as gospel. While it might feel strange to be suspicious of everyone in the trading world, a skeptical nature will protect you from making a dangerous decision with your hard-earned money.