How to Spot Stock Scams

So you got a stock tip and you just have to act on it. If you are not quick you'll miss the boat and be the only guy left at your office after everyone else quit, as they became a millionaire in the past couple of hours. Right, sure. That's how stock scams make you feel; now here's how to spot them.

Difficulty: Moderately Easy

Instructions

1. Ignore the fax machine. Suddenly a fax will appear touting a stock. These stocks (as with most stock scams) are traded on the "Bulletin Board" also known as the "Pink Sheets." These are penny stocks (usually up to $3) that are not regulated as strictly as the stocks on the broader exchanges. The rules are loose to list. It doesn't mean you can't find the next Microsoft (which at one point was a penny stock), it just means you should do your research before looking at the company.

2. Delete emails which tout stocks from people you don't know. This is another common way to spread the scams. Most scams are predicated on the fact that a group of people buy a stock, then pump the stock to whoever will listen, and then as the stock rises, they sell into the profits protecting their gains while you take painful losses. These emails are usually sent by people who are already in the stock.

3. Disregard the "tip" from someone. If someone is offering you a tip, ask yourself why they are being so generous. Chances are they are in the stock and want more buyers to come in and raise the price. It doesn't mean that people don't have the best intentions; they may be acting on a tip as well. After receiving the tip, don't impulsively buy. Do research on the company, what they sell and how their financials are doing. Then if it seems like a good fit, buy your stock over time. Google didn't hit $500 per share overnight. Better to miss 10 points on the upside than catch 10 points on the downside.

4. Throw away snail mail tips. These are still frequent especially when it comes to companies that are invested in gold or silver. They send glossy materials that make the stocks seem like a fantastic idea. And over the long haul investing in gold and silver has been profitable. Be a discerning investor. If you can't tell people exactly why you are buying the company, what they make, and where their markets are, you probably shouldn't be investing in them. Place the money in a mutual fund with a good track record and let the pros do the work.

Tips & Warnings

• If you are a risk taker, you can try and buy into the scam. But you should know that at any moment the people who started it will sell, and the rug will get ripped out from under you. If you have timing, you can ride the train up some percentage points. The trick is not to be greedy and get out ahead of time. Again this is only for the extreme risk taker with capital that is set aside for Vegas.
• Never buy a penny stock on margin if you do decide to invest. Most brokerages won't let you to begin with, but if there is an 80 percent bloodletting (which is common), you could find yourself in some serious debt.

Resources

• This site has a great article on spotting stock fraud.
• This will help you spot stock scams through false press releases commonly used.

[oldstocks]

on 3/16/2008 This site and page lists tons of info on stock and investment fraud:

www.oldstocks.com/fraud.htm

Tons of links and references on spotting, avoiding, and common examples.