6 Stock Market Scams And 6 Ways To Protect Yourself From Them
Posted by admin on December 7, 2011 under Stock Market News | 
Be the First to Comment
There’s a saying, started by a well known evangelist: “Tough times don’t last but tough people do.” There’s a definite truth in that, but there’s also a corollary: “Tough people that last in tough times had better watch out for scammers.”
Tough times definitely bring out the scammers.
Those of us who have experienced setbacks during these times that left us vulnerable to situations we never imagined we’d encounter are oftentimes searching for some “ray of hope”. This can include an online job that will pay the bills — or make us rich, or a “sure fire” method to invest that will bring us “insane profits” (or dividends). In this economic climate of a wildly swinging stock market, major housing loss, and ten percent unemployment (not counting those who have been out of a job for so long they are no longer included in US Labor Department statistics), those of us who have a little reserve cash would like to substantially increase it and create a source of steady income, perhaps to offset the income we have lost.
KNOW THE SCAMS
Those of us who are able to take the investment route are prime targets for stock market Shares scammers. Here are a few of their scams:
1) Predictive scams.
In this type of scam, described in his book Innumeracy by John Allen Paolo and quoted on the Investor Home website, a stock market “adviser” sequentially divides a mailing list in half, sending out predictions to the first half that the stock market will go up, and to the second half that it will go down.
This is repeated for the half that receives an accurate prediction and so on until he has a list of “marks” who have received at least three accurate “predictions”. These then will be eager to invest with him, and he will use “success” stories from that group to further promote himself. The moral of this story is to be very skeptical of testimonials…they may not exactly be false, but they may be the result of manipulation.
2)Playing the numbers game
Another version, described in several books including Martin Fridson’s Investment illusions and on the website Investor Home, involves mutual fund share market companies that produce a lot of offerings, aggressively marketing those that perform the best and down playing those that don’t perform well. It will continue to “sift out” the low performers and tout the high performers until it can establish a reputation for picking the winners, which it will then use to recruit investors, hyping itself as a predictive “super” firm. In choosing a company, one should evaluate all of its offerings and their past performance.
Wykipedia describes four scams, all similar to each other:
3) Pump and Dump Schemes
These are schemes where companies inflate the value of a stock stock trading, then sell it through telemarketing or the internet. They pocket your money and you are left with stock that is nearly worthless.
4) Chop Stocks
Similar to “pump and dump”, stocks are purchased for pennies and sold at inflated prices. Once again, your money goes to the brokers and promoters.
5) Dump and Dilute
Companies issue shares primarily to get investor’s money.
6) Bait and Switch
The broker or adviser leads you in with a “bargain” stock or mutual fund that is destined to rise dramatically, and then persuades you to “switch” to a more costly stock (that might be fundamentally worthless).
Scams work when a company or investment “adviser” has sufficiently “hyped” itself and created an illusion. This can be done by playing a variant of the “numbers” game listed in techniques 1 and 2, and then by leading you to purchase stock that is fundamentally worthless because of a variant on scam techniques 4, 5 or 6.
PROTECT YOURSELF
How do you protect yourself? There’s an old saying, “if it is too good to be true, it probably is”. We all have heard that saying, and yet when we find ourselves in a difficult or desperate situation (such as a job loss with no prospects in sight, or imminent foreclosure), we are considerably more vulnerable to the scammers who come along with fantastic offers.
Protect yourself by:
1) Checking out any broker or adviser with the Better Business Bureau and US Securities and Exchange ommission.
2) Research out for yourself what is being offered.
3) Type the word “scam” after the name of the broker or adviser and do an Internet search. His name might appear in forum posts by his victims.
4) Familiarize yourself with stock broker and adviser scams. It’s worth it to make sure you aren’t falling into one of them.
5) Always sleep on it before you make an investment, don’t jump. This is particularly true of telemarketers. There are many who won’t let you off the line until you’ve invested with them.
6) Do not be intimidated. If you feel the broker or marketer is intimidating you, tell him in no certain terms to “never call your phone number” again or you will report him to the FTC. If he calls back, do so.
YOUR LINE OF DEFENSE
Your first line of defense is to be aware of the scammers and their scams. Your second line is to never panic when you find yourself in a desperate situation. Don’t fall for any promise of “instant riches”. Don’t leap for what looks like a way out…
Especially when it’s too good to be true.