In the old days, way back before Al Gore invented the Internet, stocks, shares of company ownership, were sold through brokers. They had nice offices in A-list business-district buildings. Stock brokers wore suits and ties. They sat behind walnut desks and smoked expensive cigars (Yes! Even in the office!). Clients would meet with them face to face, shake hands, get to look ‘em in the eyes.
A business “going public,” making its Initial Public Offering (IPO) would hire the services of a respected brokerage house to “make a market” in its stock. The brokerage house would evaluate the company and determine whether the brokerage wanted to lend its reputation to the new company. If so, their analysts would determine a reasonable IPO stock price, and release the shares of stock for sale first to the brokerage house’s best (wealthiest) clients, then to the public. Depending on the accuracy of the brokerage’s financial analysts in determining the initial stock price, the value of the stock would remain relatively stable or rise or fall within a small range when offered for sale. Supply and demand of the market worked its magic to find the correct price, given the knowledge and mood of millions of buyers and sellers.
There were at that time people who attempted to manipulate information and thus the price of stocks. If they could somehow make the buying public erroneously believe the stock was undervalued, causing the price to rise, they could purchase at the lower price and sell at the artificial high price before the scam became public knowledge. It would work just as well in the reverse by publishing false, damaging news about the company and purchasing shares at a low point, before the fake news was dispelled and the price recovered to its correct level. Once the stock price recovered, the scam artist would sell and take his profits.
Before the days of the Internet, spreading all that disinformation was a relatively slow and expensive process.
Not so today. Today there is an entire cottage industry of scam artists with access to email addresses of millions of people. They can and do spread disinformation minute by minute to tens of millions of unsuspecting people who hope to become wealthy on a trade of a stock selling for pennies that suddenly becomes the next Amazon.com.
This is what’s known as “Pump and Dump.” Pump up the supposed value of a little known company trading on the penny stock exchanges, wait a few days while the public bids up the price based on the fake news, then dump, sell the stock and make a huge profit on nothing but the hopes and greed of thousands of unsuspecting people. There’s no broker sitting in a high-priced office behind a sumptuous desk risking his personal reputation on a financial recommendation. For all you know, the guy behind the pump-n-dump email is sitting in his shorts in a beach bungalow in Maui sipping on a Mai-tai, all paid for by the losses of the people he’s previously scammed.
This can be done with stocks in any industry, with companies anywhere in the world, as long as they’re traded on an exchange easily available to the general public. The scam artist might promote a silver mining company in Bolivia. According to the scammer’s newsletter, secret, inside information is about to be released by a geologist reporting on a new discovery of largest vein of silver in the history of South American mining. The stock, presently trading at 23 cents is sure to rise to at least $15 per share. Buy it now before anyone else finds out!
Here’s what you have to remember: There are people—hundreds, maybe thousands—who do nothing all day but monitor the Bolivian mining industry to ensure their investment clients have the most accurate, up-to-date information possible. Their clients have portfolios in the tens of millions of dollars to watch out for. These analysts get paid big bucks to do nothing all day but keep an eye on what’s going on in their respective industries in their corner of the world. If a geologist has any information that would affect this company’s future earnings, you can bet the farm that these guys know about it and the stock price will have already adjusted to reflect the expected future value of the company before the guy on the street hears anything about it.
Is that to say that no one has ever made a killing in a Cinderella penny stock? No. But your chances of making big bucks are better with lottery tickets.