If you've spent any time in Fooldom, you probably know that we avoid penny stocks for many good reasons, such as their riskiness. Another good reason is that penny stocks, those trading for less than about $5 per share, are particularly easily manipulated -- often via pumping and dumping. Learn what's involved in this practice, so that you can avoid it.
Pumping and dumping is the illegal act where someone buys shares in a company, hypes the company up to pump up the share price so that she profits, and then dumps her shares quickly, before they fall in value. Since this practice is usually done with small and volatile stocks, the pump-and-dumper's selling will likely contribute to the stock's rapid downfall. In other words, it's not something one could easily pull off with big companies such as Microsoft
This practice has flourished on the Internet, where unscrupulous folks have found it easy to pump up the stock prices of penny stocks. The Securities & Exchange Commission and others have gone after many pump-and-dumpers, so don't think of this as a new career possibility for yourself. (One famous recent case involved a 15-year-old.)
Our advice: Steer clear of penny stocks (those trading under $5 per share) and be wary of any hype that you might run across about small obscure companies you've never heard of. Here's a more in-depth look at the kind of fraud perpetrated via penny stocks. And don't forget to check out our April Fool's joke from earlier this year -- The Motley Fool's Penny Pal.
And if thinking about money matters makes your head hurt and you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service, featuring customized independent advice from a variety of objective financial experts. To take savings matters into your own hands, visit our Short-Term Savings Center.
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