How to avoid being duped by 'pump and dump' schemes

Posted at 07/22/2014 9:53 AM | Updated as of 07/22/2014 6:36 PM

MANILA, Philippines – Fraudsters involved in "pump and dump" schemes are now using social media and chat rooms to hype up stocks, warns financial adviser Salve Duplito.

Duplito said that these scams are more prevalent now because it can also be done online.

“Now, you don’t have to use your real name to pump a stock, you can use just about any respectful-sounding handle and you’re all set,” Duplito said on ANC’s “On The Money.”

According to the US Securities and Exchange Commission, pump and dump schemes involve the touting of a company’s stock (typically small, so-called microcap companies) through false and misleading statements to the marketplace.

The false claims could be made on social media networks such as Facebook and Twitter, as well as on online bulletin boards and chat rooms.

Fraudsters, who have a hidden agenda, pump up a stock and when investors buy into in, they dump it and make money in the process.

Some of those involved in the scam are company insiders or paid promoters who stand to gain by selling their shares after the stock is pumped by the buying frequency they create.

Once these fraudsters dump their shares and stop hyping the stock, the price typically falls and investors lose money.

“There is very little that regulators can do except ban these fraudsters, but that can only be done after the deed has already victimized some hapless investor. Getting evidence will also be almost impossible to do,” said Duplito.

She said that victims of what appear to be pump and dump schemes are beginning to pile up in the Philippines, with some losing P100,000 to P500,000.

To avoid being victimized by this scheme, Duplito said investors should start with awareness and vigilance.

“In a rising market, everybody seems to be a genius. Any monkey throwing darts can hit something big. But always, when the market drops, there is a deafening silence. That’s when you can separate the serious investors who know what they are doing,” she said.

She advised investors to be skeptical of any claims and resist peer pressure.

“Unless you are 100 percent sure of your strong and simple reason for buying a stock, never make that trade,” she said.

“If there is such a thing as intelligent investing, there is also intelligent speculating. Just be sure you don’t mix the two,” she added.