Feb. 1, 2011
The Internet is a useful way to reach a mass audience without spending a lot of time or money. A website, online message, or “spam” e-mails can reach large numbers with minimum effort. It's easy for fraudsters to make their messages look real and credible and sometimes hard for investors to tell the difference between fact and fiction. That's why you should think twice before you invest your money in any opportunity you find online.
Here are some of the ways investors can be tricked online:
Online Investment Newsletters
While legitimate online newsletters may contain valuable information, others are tools for fraud.
Some companies pay online newsletters to "tout" or recommend their stocks. Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock. But fraudsters often lie about the payments they receive and their track records in recommending stocks.
Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks. They may spread false information to promote worthless stocks. To learn more, read our tips for checking out newsletters.
Online Bulletin Boards
Online bulletin boards are a way for investors to share information. While some messages may be true, many turn out to be bogus – or even scams. Fraudsters may use online discussions to pump up a company or pretend to reveal "inside" information about upcoming announcements, new products, or lucrative contracts.
You may never know for certain who you're dealing with, or whether they're credible, because many sites allow users to hide their identity behind multiple aliases. People claiming to be unbiased observers may actually be insiders, large shareholders, or paid promoters. One person can easily create the illusion of widespread interest in a small, thinly traded stock by posting numerous messages under various aliases.
Pump and Dump Schemes
"Pump and dump" schemes have two parts. In the first, promoters try to boost the price of a stock with false or misleading statements about the company. Once the stock price has been pumped up, fraudsters move on to the second part, where they seek to profit by selling their own holdings of the stock, dumping shares into the market.
These schemes often occur on the Internet where it is common to see messages urging readers to buy a stock quickly. Often, the promoters will claim to have "inside" information about a development that will be positive for the stock. After these fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.
Pump and dump schemes typically involve little-known microcap companies. For more information, read Microcap Stock: A Guide for Investors.
“Spam" – junk e-mail – often is used to promote bogus investment schemes or to spread false information about a company. With a bulk e-mail program, spammers can send personalized messages to millions of people at once for much less than the cost of cold calling or traditional mail. Many scams, including advance fee frauds, use spam to reach potential victims.