By Roy Larsen, CFP®, AAMS®
We have all gotten them in the mail. They arrive as slick, colorful, glossy and in depth reports on a ground floor investment, still trading at pennies for the next great technology. They have fancy insider names to them like “Wall Street Insider” or “The Underground Stock Report”. They often link the promoted stock to legitimate companies or common sense needs around the globe. The problem is although it always sounds promising, you are gently being stroked and entranced into participating in what is known as the “pump and dump.”
The anatomy of the scam involves these micro sized companies which typically trade on the Over the Counter Bulletin Board (OTCBB). They are also known as “Pink Sheets”. The OTCBB is not a part of the Nasdaq Exchange and typically involves extremely small start up companies with questionable stability. They usually pay a “stock promoter” a large sum of money and often they themselves are also part of the scam. Large blocks of stock are being accumulated and the mailer goes out.
The trap is now set as unwitting investors start to see the stock moving off the bottom and attempt to catch the wave. As investors pile in and drive the stock price higher the owners and stock promotes sell everything, “The Dump”, and leave you holding the bag. Often they will drive you to internet bulletin boards with carefully controlled messages as you patiently wait for the next great “thing” to rise from the ashes of a few pennies or micro pennies to .50 cents, a dollar, maybe the next Google! Hey, even if it went to .04 cents, I would double my money right?
Unfortunately, after the promoters and company insiders leave the building, although these companies will continue to trade for a while, they very rarely stick around for long. Need more evidence of a possible scam? Read the small print. The words we want to make believe aren't there because of all the great claims and pretty graphs that have us mesmerized with the potential riches of the world. The small print will actually tell you how much the promoter is being paid, whether they own shares and highlighting in numerous ways that this is in fact a very speculative high risk investment.
The reality is in my opinion, it isn’t an investment at all; it is a major scam that should be stopped. So this week when the next slick looking mailer arrives at your home and you think, hey, it’s only $5000, let’s take a shot! Throw it away!!! Potentially good and great companies do not start on the OTCBB as pink sheets. The stock market has its own inherent risks and if you treat it like a casino; you are very likely to have the same result as when you go to a casino.
Roy Larsen, CFP®, AAMS® is a Fee Only Certified Financial Planner practitioner and acknowledged fiduciary. He works with clients in the Gainesville, GA. area outside of Atlanta and throughout the United States. Larsen Wealth Management specialized in the distribution phase of retirement or your version of chapter two. Roy has been quoted in the Wall Street Journal as well as the New York Times and has won the 5-Star Professional award for 6 consecutive years as one of the top Wealth Managers in Atlanta. Roy can be reached at 678-696-8755 or roylarsen @investinretirement.net.
The opinions voiced in this material are for general information purposed only and are not intended to provide specific advice or recommendations for any individuals(s). To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Roy Larsen is a Certified Financial Planner™ practitioner and Fee Only Wealth Manager who resides outside of Atlanta, Georgia.
Roy's Financial Blog contains articles on multiple financial life events as well as his favorite questions from he receives from around the country as a an expert panel member for Investopedia's Advisor Insights.