Investing for Beginners

What are pump and dump schemes?:

Well, for starters, they're illegal. The SEC formally defines them as schemes involving "the touting of a company’s stock (typically small, so-called 'microcap' companies) through false and misleading statements to the marketplace." Realistically, the schemes are done through marketing on social media sites by spreading false information about a stock. For example, you might see multiple messages on various media sites claiming a certain stock is excellent and a great buy (Keep in mind, people are hired to do this). As the SEC mentioned, these stocks are typically low cap stocks since larger companies such as Microsoft or Apple are fact-checkable. This is the "pump" period of the pump and dump. Those promoting this stock buy the stock earlier and see the price jump as many buyers enter the market fooled by their marketing. Cleverly, many scammers use this uptrend to promote the stock even further. Now for the "dump." Once the stock hits record highs, the masterminds behind the sham sell their shares for much higher than they purchased. Soon follows the madness; before everyone realized the stock is artificially pumped, it's too late. The stock immediately plunges which means huge losses for those who bought it for a high. How is this illegal you might be wondering? It might seem as though if you get duped, you deserve too. Well, the only problem is that some people might invest their life savings into the buy (I know this isn't a smart thing to do) and completely lose it all. Not to mention, the scheme when thought about as people manipulating a financial asset's price sounds clearly illegal. That's the basic run-down of a stock pump and pump.

Example of a pump and dump: 

 

A clear case of a pump and dump is LEXG who spent 3.3 million dollars on a marketing plan which boosted its stock price from 10 cents to 9 dollars. Despite the company having no cash and no real profit, the scheme placed to stock's market cap near 500 million dollars. Just a fun fact. 

How to avoid a pump and dump:

Avoiding these is the not the most difficult task yet a task nonetheless. First of all, never listen to incredible stock advice. For example, spammed comments on social media. Always do your research first and never be easily swayed by a pick recommendation. Fake news also included sensationalist news provided by shady stock pickers online. Many read articles along the lines of "How a new company is breaking into this 8 trillion dollar industry." Very misleading and also very fake. Just avoid anything that isn't backed by credible sources.

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The first thing a teen must come to terms with before getting into the stock market is understanding that the Market is a risky place and serious business. Some lose much of their savings due to a lack of knowledge of the Market. Most youngsters, from my personal experience (and I'm sure statistically) are very oblivious about the stock market. Therefore, I recommend teens first learn the basics about the market. This can be as simple as reading market news regularly, managing simulator portfolios or even investing low capital in the market. Yes, yes, I know - some of your parents won't let you open a custodial account or manage their accounts. Do not get discouraged, you will be 18 years old in no time. Meanwhile, familiarize yourself with the Market by investing paper money on simulators. I also recommend competitions such as the Stock Market Game and the KWHS investment challenge to compete and fully test your trading skills. I have done these competitions personally and although they placed an extra workload during my junior year, it was very exciting to work on these projects. Therefore, I highly recommend them to you too. To summarize, before investing real money, try and get an overall understanding of the Stock Market. If you are wondering where to start, you can begin with learnings market indicators and how they affect a stock price. You can find info about them on Articles >> Market Indicators.

 

Hope this cleared up any doubts and if you have any questions or concerns email us at This email address is being protected from spambots. You need JavaScript enabled to view it.. Have a Great Day!

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Brief Explanation of stocks:

If you are new to trading, you might be wondering what stocks are. Stocks are essentially a share of a company which you can purchase on the Stock Market. Outstanding shares also known as Capitol Stock are the total number of shares (stock) the company consists of. This includes restricted shares proprietary to company executives, public stock and stock owned by institutions. After a company's IPO, the price of a stock is determined by the market and the long term price is set based on how profitable investors see the company. Stocks exist for various reasons. One being that a company executive cannot "cash out" if he or she does not sell their stock. This is because their assets are in the form of equity in their company but not in real cash. Additionally, since stocks change value, being a smart investor able to read the market can help many struggling financially to gain financial independence.

Brief History behind stocks:

As you might have learned in school, buying equity in companies dated back to joint-stock companies in the 1600s. Equity in these companies was sold so merchants could fund the ships' ventures in the first place. However, the stock market broadly known as The New York Stock Exchange (NYSE) was founded on March 8th, 1817. As we learned in APush, the Securities and Exchange Commission (SEC) was formed in 1934 by FDR as a way to regulate the Stock Market.

Hope this cleared up any doubts and if you have any questions or concerns email us at This email address is being protected from spambots. You need JavaScript enabled to view it.. Have a Great Day!

 

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