Advice for novice traders on how to avoid pump and dump schemes

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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