Spam Emails About Individual Stocks: What’s The Scam?

A reader wrote to me recently asking about the proliferation of spam emails concerning individual stocks:

I often get two or three spam emails a day touting a specific stock. I’m smart enough to realize that this is some kind of scam, but how exactly does it work?

This type of scam is called a pump and dump, and you’re far better off ignoring such emails completely than looking at them at all.

They all generally follow the same form: they identify a company and a stock you’ve likely never heard of and give some astounding reason as to why this stock is going to go crazy in the next day or two, usually some sort of “news” that came out after the market closed yesterday.

Here’s exactly how the scam works:

1. Overnight, a con man sends out the spam emails identifying this “hot” company. The email usually encourages people to track the stock.

2. The next day, right at the start of trading, the scammer buys a fair amount of the stock, causing it to make an initial jump in price.

3. The scammer then often posts on message boards or on blogs about how this stock is hot, pointing to the huge upward trend to start the day.

4. The scammer usually continues to buy in bits and pieces throughout the day, keeping the demand up and lifting the price even higher, but this isn’t always necessary.

5. At some point during the day, though, the scammer executes a sell-limit order, meaning that his brokerage is to sell all of his stock if it reaches a certain level. For example, the stock might start the day at 1, the scammer is able to buy enough so that the price goes up to 6, and he executes a sell-limit order at 10, meaning that the instant the stock hits 10, all of his shares go up for sale.

6. Often, after a half day of doubling or tripling in price, some of the scammed people decide to buy in, driving the stock even higher.

7. When the scammer’s sell-limit price is surpassed, all of his shares go up for sale at the elevated price. Anyone who has fallen for the scam will then buy these inflated stocks.

8. The scammer gets out of the stock entirely, selling all of them at an inflated price and making a big profit. The people who believed in the scam are now holding onto vastly overvalued stocks, which will rapidly plummet in price down to their low level.

If you buy this stock, you’re going to be the person left holding the overinflated stock that’s rapidly losing value. In other words, you were just talked into buying a $1 stock for $10 or more – and very quickly, that stock will go back to $1.

How can you fight this? First of all, ignore all emails promising a hot stock tip. If it’s an unsolicited tip from someone you don’t know, someone’s out there scamming a buck – and you’re the one who’s going to get scammed if you pay attention. Second, if you must follow up on a stock tip, do some research. Find out if the company actually files reports with the SEC – if they don’t, that’s a sure sign of a giant scam. If they do file reports, very, very carefully investigate the “big news” – and only accept the news if it comes from reputable sources (AP, Wall Street Journal, and Reuters, basically). Better yet, don’t waste the time and just delete that email entirely – it’s not worth the risk.

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20 thoughts on “Spam Emails About Individual Stocks: What’s The Scam?

  1. Laura says:

    i get the emails and the faxes on stock tips some many times during the week. I just shred/delete it when it comes. No need to waste my time on this trick.

  2. FMF says:

    Same as Laura for me.

    Many people are on to this trick, but I’m sure they get some takers — otherwise, why keep at it?

  3. Sm4k says:

    It’s just like those Nigerian email scams. Believe it or not, there are people who still fall for those.

  4. Oswegan says:

    Whew,

    I’m way to broke to fall for that scam.

    ~Oswegan

  5. Money Socket says:

    I don’t know why, but I’m starting to get at least four Nigerian email scams every day now. It sucks that there are so many people out there who just aren’t internet savvy, and when they get stock tips emails or scam emails, they think its a legitimate letter from someone and fall for it. The reason the stock emails and scam emails still exist is because they are still working. That is unfortunate.

  6. !wanda says:

    The vast majority of people don’t fall for it, but it basically costs nothing to send an email to millions of people. The scammers pick stocks that have low trading volume, so if even a small percentage of those people buy the stock and influence the price, the scammer can make a lot of money.

  7. Jillian says:

    Maybe if you got in quick at the beginning of the day and pulled out just before the scammer you’d beat him at his own game? Did I just say that?

  8. Mrs. Micah says:

    Well, Jillian, what I was thinking was “where can I sign up?” Not for being scammed, but it’s a fascinating way of manipulating market prices. That said, I’d never actually do it…. ;-)

  9. Reagan says:

    I think the scammer sells bits and pieces to the scammed as the price goes up.

    If he executed a limit order all at once, only existing buy limit orders matching his sell price and market orders would fill, thus driving the stock back down in price rapidly. It would become a situation where the buy bid is $10 @ 100 shares and the ask bid is $10.01 @ 10,000 shares. That’s when other holders start to sell lower (e.g, sell limit order of $9.99)

  10. benp says:

    There’s another stock scam thats really harnesses the power of the computer. A company sends out an email where they predict several stocks to go up or down in the future. The trick is they send different permutations of which stocks go up and down to different people, but for a small fraction of people it really does look like they predict stock performance. For example if they pick 4 stocks, there are 2^4 = 16 permutations of the stocks rising or falling. If they send out 16000 spam messages, then 1000 people get an email that correctly “predicted” the market. And once they have someone confidence, they are a lot easier to take advantage of.

  11. Would you believe I fell for one of these things just last year? It was during a financially vulnerable time and I felt I needed a “pick me up” and found it in a stock tip over the message boards. I thought that it was only for a few thousand dollars, it shouldn’t be a big deal even if it doesn’t pay off. There seemed to be “legs” in this particular penny stock’s movements. Of course I lost money — half of it in fact before I gave up. All in a few months.
    Moral of the story: Don’t trade when you are in a bad mood.

  12. There is a huge study on this online somewhere, I couldn’t find it though. The scammer has already bought stock before sending out the emails, then he waits as prices tick up. If there is movement, they will send out another email (“look it’s one up!”) until they finally pull out. Some guy had a website where he mock traded for all the stock spam he got. Spammers sometimes make money and sometimes break even.

  13. Try the Google and get this site.. 21 st Century Vitamin and you will see the small print that is exactly in line with the duped us.. *This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.
    Firozali A.Mulla MBA PhD
    P.O.Box 6044
    Dar-Es-Salaam
    Tanzania
    East Africa

  14. John says:

    Trent,
    Good post on spam on individual stocks. I can’t believe it, I can’t believe it, everywhere one turns someone is trying to rip you off. Integrity is the backbone of life. No integrity, no life. Look at the world today, wouldn’t you say that it is spirilling out of control ? I guess that “Greek guy” with a lantern is still looking for an honest man ? john

  15. Andamom says:

    Nothing special here — spam is spam – stock tips, ‘Nigerian offers’, medical treatmets, etc. Spam really is anything that you have not requested but randomly appears in your in box — and the in box of others. Your best bet is to get a spam blocker and filter as much email as you can.

  16. Matt says:

    Watch the movie “Wall Street” or “Boiler Room” to get a good idea of how stuff like that is done. They’re great movies too.

  17. Michael says:

    http://www.qwoter.com/spam.php

    (This is not my site.)

  18. Jim Lippard says:

    Just wanted to second the comment that usually the scammer already has the stock in hand–and in some cases has been affiliated with the owner of the penny stock company and has been paid in stock to promote it. And yes, that’s illegal.

  19. We almost wish we hadn’t bought our house with this tough economy. Doing all we can to keep groceries on the table.

  20. Dickies says:

    Good stuff, I “Stumbled” you. My DIGG account got messed up but I like Stumbling better anyway.

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