I’ve been trading stocks since 2001 and consider myself fairly seasoned when it comes to equity investments. This is why I am still embarrassed to discuss an investment scheme that I fell for earlier this year. However, it’s high time that I ‘fess up in order to prevent such a financial catastrophe from hurting other investors.
In February of 2012, I started getting “hot tip” emails from Bollinger Report about a penny stock that was about to appreciate very heavily thanks to its gold mining explorations. The company in question is North Springs Resources Corporation and its stock ticker is NSRS. At the time of the emails, the company was trading at roughly 40 cents per share. Below is a graph of the company’s stock price over the past year, courtesy of E-Trade:
As you can see, NSRS was appreciating rather quickly from the start of 2012 until I started receiving my fateful tips. Rather than investigate further, I decided to buy into this promising stock. And buy I did; by the time my trades settled, I had accumulated over 67,000 shares of NSRS!
At that point, I thought I’d sit back and watch this stock appreciate over the next year or two. However, something kept gnawing at me and I decided to check my NSRS holdings only two days after buying shares. Amazingly, the stock had appreciated almost 200% since I last looked! I decided to make the unusual decision to cash in on my luck and sell the stock. In the space of just 2 days, I’d made a grand total of $13,139. Great, huh?
Just 2 days later, NSRS was trading still higher at $1.40 per share and I was kicking myself for selling it. At its all-time high on February 7, 2012, the stock was priced at $1.72. Had I kept my NSRS shares and sold them at that height, my mortgage would’ve been paid off by now with money to spare, a fact I could not let go of at the time. I made plans to buy the stock again (spoiler alert: big mistake ahead).
Then, maybe as a sign for me to stay away, NSRS shares started dropping like crazy in the space of a day. By February 9th, the stock was priced under a dollar. By the 16th, shares were bouncing around 50 cents. The ride was over.
Not exactly sure about what I had just witnessed, I decided that the company had a promising future and would soon go through another “wave”. I sunk my stock winnings into NSRS and waited patiently.
And waited. And watched as NSRS sunk even further. And waited some more as it slightly recovered- only to sink further. By the time my investment gains had all been erased, NSRS was trading on pennies. What happened here?
I Was Scammed
Had I been more Google search savvy, I would’ve recognized the rise and fall of NSRS’ stock as a classic “pump-and-dump” investment scam. In a pump-and-dump, scammers “pump” up a given stock by creating blog posts and sending legitimate-looking investment emails to would-be investors alerting them about a company that’s breaking out of penny stock (i.e., under $1/share) territory.
These scammers also buy a certain amount of the company’s shares in order to quickly appreciate it and create the appearance that the business is experiencing higher than usual trade volume. Investors buy large portions of the company’s stock because it is priced so low, driving up its price exponentially. When the stock has doubled, tripled or even quadrupled in value, the scammers quickly “dump” their stock shares and disappear.
The massive stock sell-off has the effect of suddenly lowering the company’s stock price by 50, 90 or even 99%. Legitimate investors who had hoped to hang onto their stock shares for months or even years are left with piles and piles of almost worthless stock.
The Financial Industry Regulatory Authority (FINRA) mentions pump-and-dump scams on its website and how to spot them. These scams, among other types of investment frauds and scams, are commonly perpetrated because they are extremely lucrative. Furthermore, the scammers know that they can rely on common investor emotions like greed for money and fear of “missing out” on the next Apple or AOL. And speaking of AOL, in 1992 the company also started out as a penny stock that made its investors billions over the next several years. So, while not all penny stock investments are scams, the vast majority can result in you losing most of your money.
How to Avoid “Pump-and-Dump” Penny Stock Scams
Given that not all penny stocks are bad investments, how can you, as an investor, learn from my $13K mistake? Here are some tips:
- Avoid penny stocks recommended by no-name investment “firms”. Watch out for unfamiliar stocks that are being praised by no-name investment blogs and/or websites. If a site like IMNinvestor.com starts praising a stock you’ve never heard of and which a site like Fool.com doesn’t even list, your best bet is to stay away.
- Research the recommended stock. If you find yourself swayed to invest in an unfamiliar stock, do your research, check the company’s financials and perform an online search for the stock ticker after pairing it with the word “scam”. If your search engine starts spewing out pages and pages of scams associated with the stock of interest, you can bet there is probably a pump-and-dump (or some other) scam going on.
- Look at the stock price chart. Stock price charts are readily available from Yahoo! or discount brokerages like E-Trade. A meteoric rise in any stock’s price usually precedes a meteoric fall. Don’t gamble on your ability to sell at just the right time; it’s been said ad nauseam that you can’t time the market. Just look what happened to me as an example.
The Bottom Line
Overall, I was quite lucky when it came to being pump-and-dump scammed: at least I made money on the scam before I later lost it. However, I wonder about the investors who did lose money on this stock and if they’ve recovered by now. Hopefully, no one sunk his or her life or retirement savings into NSRS, but the probability is that someone did- and someone else took that money away.