How To Identify Pump-And-Dump Penny Stocks

Penny stock trading can expose you to fraud more than any other investment vehicle. You need to watch out for pump-and-dump schemes, where scammers drive up the share prices by purchasing a large volume of a specific penny stock, then promoting it wildly, only to initiate massive sell-offs after average investors began noticing and buying them. To be able to avoid this, you need to learn how to buy penny stocks.

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There are real companies on the over-the-counter market that are trying to make an honest dollar and hit high share prices through good business practices. Then again there are OTC companies whose only job is to artificially inflate their stock price and dump as much of it as they can into the gullible public's hands (pump-and-dumps).

You can make money with both, but they require different approaches. For a real company, you have to believe strongly in it, because the OTC market makers will frequently engage in naked short selling tactics that will cause false 'crashes'. If you are sure that your real company is a quality penny stock which isn't likely to disintegrate, you will be able to master your negative emotions during the crazy swings.

For a pump-and-dump, you'll need to buy early, preferably just as the hype is starting, and sell while people are still excited. In the case of pump-and-dumps, ‘false’ crashes are not so false, so all negative action needs to be considered extremely dangerous and you should be ready to bail at a moment’s notice. Your other option for pump-and-dump penny stocks is to short them when you think their share price has finally peaked and the crash is imminent.

A quick way to tell the difference between a quality penny stock and a pump-and-dump is to see whether the company has paid for a promotion. Real companies don't pay for stock promotions, or do this only on extremely rare occasions. If your chosen company has done this, they are simply trying to push stock onto you, and they are not interested in long term business success.

Visit StockPromoters.com and type the stock ticker into the search field. If it says a company was paid x amount of dollars for a promotion, especially multiple times, that's a pump-and-dump company. If the penny stock you are in has paid for a promotion recently, look out! Stock promotions, especially recent ones are a sure sign you are riding a pump-and-dump wave, or at least are in a company that's in trouble.

If you find a stock with lots of FREE promotions, that doesn't mean anything because most promoters love to look smart, so they will piggyback onto almost any company's rapid success just so they can claim they 'called it'. This way they can build up their ‘amazing’ track record, and later sell you a paid promotion for a fake company.

This, of course, should only be one of many metrics you use to judge a company. Use stock screeners intensively. 90% of small businesses fail so no matter how "legit" you think your penny stock seems, the odds are it is going to go to zero eventually.