Pump and dump
You’re led to believe when reading press releases and items on discussion forums and social media that the value of a security (usually a stock) is going to rise significantly, so you, along with many other investors, purchase the security, which pushes the price up. Now all you have to do is wait for the value of the security to increase even further, as expected. This turns out to be a big mistake. The security’s value abruptly drops to virtually zero and you lose everything.
When a security is not very liquid (demand for it is relatively low), a single buyer can make the price shoot up. Conversely, a single seller can cause the security’s value to plunge. The scammers owned a large quantity of the security you purchased. They bought it at a very low price and sold it to you at a high price that was reached by fraudulently generating demand.
You therefore overpaid for a worthless security.. As the company you invested in does not have any assets, you were left holding an investment that has no value.
Trash and cash
This is the opposite of a pump and dump scheme. Here, the fraudsters circulate information that leads you to believe that a relatively illiquid security is likely to plunge in value and should be sold off. You, along with many other people who saw the information, sell the security, causing the price to plummet. The fraudsters then swoop in to buy it up at a low price.
Help protect yourself against these types of fraud
- Ask yourself what people are getting out of giving you “hot tips” on investments.
- Always take the time to find out more about the investments you’re being offered.
- Seek the opinion of a representative authorized by the AMF.
- Read the prospectus.
- Don’t rely on the testimonials of people you don’t know.
- If the information comes from a friend, be careful. The person who gave him the information could be a fraudster.
- Be extra cautious if you plan to trade on over-the-counter markets (also known as OTC Markets or Pink Sheets). Companies listed on OTC markets often don’t meet the criteria of the major stock exchanges. In many cases, the company’s stock is held by a small number of shareholders, making it easier to manipulate it.