Don't Be a Pump-and-Dump Chump
Nearly every day when I check out the junk folder in my e-mail inbox, I find at least one unsolicited e-mail trying to convince me that RIGHT NOW is the time buy some cheap penny stock. These kinds of solicitations, almost without exception, are connected to schemes known as pump-and-dump scams, where fraudsters will buy up a bunch of low-priced microcap stock (the prices usually vary from a fraction of a penny to a few cents per share), blast out millions of spam e-mails touting it as a hot buy, and then dump their shares as soon as the share price ticks up from all the suckers buying into the scam.
The resulting flood of shares dumped back into the market causes the price of the pumped stock to plummet, and very quickly investors not in on the game lose everything they invested.
At least two different recent studies have shown the effectiveness of stock spam in both convincing people to purchase shares of the touted company and in boosting the price of the stock. But what about the effect on people left holding the bag from these scams?
Enter Joshua Cyr, curator of Spamstocktracker.com. On May 5, 2005, Cyr set out to determine just how much money he could lose by trusting stock picks advertised via spam. Cyr began tracking the price of each stock after receiving a spam tip, and found that if he had bought 1,000 shares in each of the several dozen companies, he would have lost about $46,000 over the past 15 months.
While researching this subject I came across another blogger who is doing some fairly real-time tracking of stock spam effectiveness, with graphics that track the appearance of stock spam alongside the stock's daily market performance and links to any related spam e-mails.
Stock spam has been estimated to make up about 15 percent of all junk e-mail, though I'm sure that number fluctuates quite a bit. The Securities and Exchange Commission occasionally brings cases against stock spam scammers, but the agency probably doesn't have anywhere near the resources it would need to make a real dent in this problem. What's more, the spammers don't have to worry about setting up Web sites and keeping them reachable; as long as they have a ticker symbol to pimp, they're in business.
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