A pump and dump occur when the price of a market rises exponentially and garners widespread public attention, only to be “dumped” later as the price falls.
When traders or news outlets promote a specific market, many sources say that pump-and-dump schemes are illegal. However, the truth is that it makes no difference.
Because pump and dumps occur in all markets and timeframes, with or without media coverage, whether legal or not!
Many new traders fall for it whenever the news and price are hyped. It could be why many people start trading because those markets or stocks are getting a lot of attention.
However, often new traders tend to buy the tops and become trapped when the market begins to crash.When Cryptocurrencies became so popular that many people became “traders” to ride the hype train?
So, In today’s blog let us discuss how you can stay away from Pump and Dump Stocks:
What is meant by Pump and Dump?
Penny stocks are frequently used in the scheme. They are stocks with a low market capitalization. Microcap stocks are typically traded over the counter (OTC) at less prices. In addition, they do not follow strict public listing requirements.
As a result, fraudsters can easily manipulate information about securities. In addition, because potential investors need more sources to check all available information about a company, the lack of public information creates additional favorable conditions for fraudsters.
Furthermore, microcap stocks are highly illiquid, with meager trading volume. As a result, even minor transactions can significantly increase the security price.
Fraudsters may use various tools in a pump and dump scheme, including cold calling, email spam, and fake news releases.
How to stay away from the Pump and Dump Stocks?
Let us discuss how to stay away from such stocks so that the traders don’t get trapped in them:
1. Is the Company doing Business?
Let us take an example: From below, Quest Softech Ltd. has given a return of around 2300% in the last two years! You must be thinking that a huge return is generated!
But we should only invest in this Company by looking at this. We also need to check the balance sheet and the Company’s fundamentals.
From here, we can see that the sales are zero, meaning no business exists. If we go down, there is nothing like profit. Let us go to the balance sheet. If we go inside the balance sheet, the shareholder fund is only 4 crores.
And if we talk about the asset, then the asset of this Company is a non-current asset of 4 crores. Do you understand? Is it fraud or not?
3. How is the Shareholding Pattern?
Now let us take an example of another small-cap stock-Raj Rayon Industries Ltd. We can see that in the last 2 years, it generated more than 34000% return! Amazed?
Now let us check the shareholding pattern- Now, how will the shareholder get it? This is a big question that should be asked. This is also a very interesting observation because the shareholding pattern gives us an idea of everything.
The promoter holds 94%, which means there are no shares of the Company in the market, and there will be no shares, which means the free float will be less, and free float means non-promoter holding.
If there are no shares in the market, then obviously, whoever wants will raise the share, and whoever wants will lower the share. So it is necessary to see the financials, basic financials, what the Business does, whether there is performance or not, whether there is an asset or not, and what is the shareholding pattern.
4. What does the Balance Sheet say?
Let us go to the balance sheet and check the fundamentals of the Company:
We can see that the Company has reported consistent losses, negative return on capital employed, and cash from operations is negative for the Business this year, which means it is raising money to sustain.
If any business or Company does, it will have to see the cash from operations. See here this Company’s cash from operations is negative, which means it is not doing Business.
Whatever money you might be realizing, it will be by investing or financing activities. You do not want to invest in such companies where there is no business.
4. How is the price movement?
Now let us analyze the technical chart of the Company:
How is the price movement? This is also very important to understand because when the price movement is steep, it means something wrong that wants to trap you.
You can also do our course on Online NSE Academy Certified Capital Market Professional (E-NCCMP)
5. What kind of people is talking about this?
If you see on social media that people with less credibility are talking more, then you can assume that they have been given money, so they talk about it and fool you.
You can also watch our video on BE SAFE from these PUMP & DUMP STOCKS!!
Bottomline
One needs to be very careful with the stock you are investing because, ultimately, it is your money, and your money will be very useful for your child later if you do not waste it.
We hope you found this blog informative and use the information to its maximum potential in the practical world. Also, show some love by sharing this blog with your family and friends and helping us spread financial literacy.
Happy Investing!
