Friday, January 05, 2007
The pump and dump
The pump and dump
When I mentioned pump and dumps earlier, I didn’t have such a prime example as I do now.
At the time of the first writing I was without any recent mailings of a scheme known as the “pump and dump” where speculators pump the worthiness of undervalued stocks and hope that the sheep follow to boost the price into the stratosphere.
Unfortunately most new and inexperienced investors are intimidated by the amount of knowledge or general know how that is required to do well in the stock market. The stock market can be a dangerous and unforgiving place and the small investor can be sucked in to thinking that anyone else’s opinion is worth much more than their own opinions.
The stock was GDKI.pk and it was mass-mailed to my email address over the weekend of December 25. The US markets were closed on the day of December 25 but were to go back into trading the next day, a Tuesday.
Below is a chart of the stock over the days involved:
The first red marks the point where the email was sent. The stock was trading for about 9-9.5 cents per share before the email was even published and sent. The operator of the scheme probably placed his entries during the week before the pump and dump was to happen. That is most likely the reason for the small increase in price and volume during the earlier week.
The blue is most like the time at which the operator of this scheme sold the majority of the stock. Usually the operator of the pump and dump scheme holds the most shares because he or she can easily sell the shares to those buying into the scheme.
I marked the orange square as most likely being the top to this scheme. I cant see the stock moving any higher than it is now, the operator has sold out and there is no one left to promote the stock. As we know, in order for a stock to gain in value it must receive new investment capital from previous investors or from new investors. After such a great gain the new investors will be slower to place money into the equity fearing a total loss.
Interesting enough, I believe the operator of this pump and dump, at least this time as he or she hasn’t in the past, knew someone involved in the company. The operator either came in contact with an official or sent out a press release with on his own accord to bolster the stock price. Press releases can be sent from variety of online companies. For less than one hundred dollars it is possible to get your news release on the top of the news pages for the specific stock and I think this is what the operator did.
The release was hardly newsworthy, probably just some junk thrown together to keep investor interest and confidence high enough to suggest more investment dollars would be a smart move. These press releases can be sent by any one, your six year old could compile a story and send it out via one of the thousands of press release websites on the internet and for $30 get it on yahoo news.
After seeing the chart, you might get the feeling that it would be profitable to follow these schemes. And it might be. But investing is more than just making money, its about making money and keeping your morals intact. By participating in a pump and dump scheme you are taking place in an illegal activity, and benefiting only the brokers and the operators. You’re encouraging spam and the playing upon less informed investors.
Question?
When you first started investing would you like it if someone preyed on your investment dollars?
No! When you first start is when money means the most to you. Do not fall to the bottoms that these operators have fallen. Feeding on the lack of experience of others is not how you want to make your money.
Follow the trusted path, take investment in stocks that you think will perform well, not those that you know will lead to a loss of many people at your gain. The stock market already lacks forgiveness, do not make it any worse!