The stock market is rife with opportunities for the average investor to make extraordinary returns. It’s also rife with scams, especially for cheap shares anyone can buy.
Newbie investors are particularly vulnerable to certain scams, such as notorious pump-and-dump schemes involved with penny stocks. As these are the types of shares newcomers are most likely to invest in, the risk for being duped is high.
If you are a relatively new investor in the market, refer to the advice below to protect yourself against thieves and con artists that tend to flock around the low-cost shares:
Do Not Confuse Promotional Material with Research Reports
Legitimate trades are often accompanies by research reports on how well the stocks are doing. Investors do need to read these reports when trading. However, it’s very important to distinguish between an actual research report and a promotional item designed to look like a research report. Scammers may right flattering “reports” of worthless stocks and widely distribute these. Think of it as the difference between a real news article and an ad designed to look like a news article. You can easily distinguish between the real and the fake by looking at the disclosure section of the report. If the writer is being paid for it, then it’s not an actual research report.
Beware of the Emails
If you get an email asking you to buy a particular type of share or stock, assume that it’s a scam. It’s been well noted that pump-and-dump schemers target their victims using emails. If you get the same “tip” from several different emails, then stay away from whatever the share they are selling. Be careful of similar “advise” you may receive from social media sites as well. If you are curious about these emails, ask a trusted source about the shares before you spend any money.
Hype and Soaring Prices are Not Good Signs
If you hear about a hip new stock from emails and social media posts, you would naturally check the price of the stock. When you do so, if the stock’s value is flying high over 50 percent, stop right there and think. Hyping combined with rising prices is a sign of pumping, so take care to stay away from such trades.
Verify the Company or Trading Firm Information
Don’t forget to double check the addresses, phone numbers, business profiles, and websites provided for the trading firm or the company the shares originate from. This level of basic research shouldn’t take more than an hour. Make sure the address is legitimate by doing a Google Map search. If proper compact information does not exist, then the company may not either, at least not in the form as advertised. Remember that a legitimate company would be registered in any jurisdiction.
Speak to the Trader
Most scammers have anonymous online profiles. If you want to work with a legitimate seller, pick up the phone and call them. Or better yet, ask to meet. Ask probing questions to determine if the trader is offering something that is actually valuable. Be on the lookout for evasive answers, which are a glaring sign of a con.
Generally speaking, doing your research well should protect you against the most common types of trading scams. Educate yourself and learn how to tell a legitimate company apart from a fake one.