According to the U.S. Securities and Exchange Commission (SEC), “Pump and Dump” is one of the biggest investment scams used on unknowing investors. A stock is strongly advertised (pumped) through different means, investors buy into the hype, and the scam artists discard (dump) their shares at the peak share price, leaving other investors holding the bag when the price goes down.

Stocks can be pumped to attract investors in various ways, including newspaper ads, faxes, and cold calling. Since the birth of the Internet, advertisements via Web pages, investment message boards, and chat rooms are popular ways to pump stocks. A company may also use its Web site to announce press releases indicating that major developments have been made or are about to be made.

How can an investor avoid a “pump and dump”? It is easier to “pump and dump” stock in companies that lack transparency, which means that very little information has been provided by the company. By performing research, an investor can make a more informed decision as to whether or not a company has potential as an investment or if it is just a “pump and dump” scheme. Many “pump and dump” schemes are performed by pink sheet companies (those that are barely known and only lightly regulated) because they do not have to report financial information to the SEC to the extent that larger companies do.

How should an investor proceed if he finds himself invested in a “pump and dump” scheme? The key is being able to recognize the scheme before it is too late. Investors should look for promises that are never delivered, share buy-backs that never happen, dividends that are never paid out, etc. An investor may be able to retain his investment if he sells his shares before the scammers, and may even make a profit in the process.