Stock trading is a great place to start investing your money, no matter what your level of experience and knowledge is. However, it’s important to be aware of the many different stock market scams out there. That way, you know how to spot and avoid different types of fraud to protect yourself and your hard-earned assets.
Top Stock Trading Scams and How To Avoid Them
Shell Companies
In shell company investment scams, the fraudsters create fake companies that serve no real purpose other than to make themselves money through a stock trading scam. These inactive companies are known as shell companies.
Once the scammers have created one or more shell companies, they work to artificially inflate stock prices for the companies. They may use a variety of different tactics to do this, such as releasing fake press releases about a shell company’s activities and success to generate interest in its stocks.
Scammers have also been known to use the names of big, reputable companies in the names of their shell companies in order to make it appear as if they are affiliated with a well-known brand, such as Apple or Amazon.
Once the fraudsters have successfully inflated the stock prices of their shell companies, they sell off all their stocks at a profit.
How To Avoid Shell Company Trading Scams
To avoid losing money to a shell company stock trading scam, it’s best to invest in large, established companies with proven market values and high trading volumes, especially if you’re new to the stock market. This helps you avoid the issue of artificially inflated stock prices for companies that aren’t really who they say they are. Always do thorough research on any business you’re considering buying stocks in to ensure they are legitimate, a wise investment, and aren’t on any blacklists.
Boiler Rooms
Boiler room trading scams are run by fraudulent stockbrokers who use high-pressure sales tactics to pressure investors into buying stocks in questionable businesses. They do this to earn fees and commissions, or they may be working with other scammers to artificially inflate the prices of stocks as part of a pump-and-dump scheme. Boiler room scams typically involve the scam brokers reaching out to you unsolicited, often by cold calling you or contacting you via email or social media.
How To Avoid Boiler Room Trading Scams
Boiler room scams are easy to avoid as long as you don’t give in to high-pressure sales tactics and don’t listen to investment advice from any brokers or advisors you don’t know. If you’re new to trading, try to get a reference for a broker or an investment advisor from a friend or family member who you trust. This helps ensure you don’t purchase any of the types of high-risk stocks that boiler room scammers push.
Churning
Churning is another fraudulent tactic that shady stockbrokers use to earn fees. In churning scams, the fraudulent brokers push people to sell off quantities of certain shares they earn, with no regard for whether the advice is actually good or not. The goal of this is to generate higher volumes of stock buying and selling, or churn, in the brokerages’ accounts in order to generate more income for themselves.
How To Avoid Churning Trading Scams
Make sure to only work with reputable brokers and watch out for any high-pressure advice to sell off certain stocks. Even if you trust your broker or investment advisor completely, always do your own independent research to back up the advice they give you about selling off stocks you own.
Pump-and-Dump (Penny Stock Scam)
Penny stock scams involve the buying and selling of low-value stocks, typically those that cost under $5 per share. Pump-and-dump scams are one of the most common types of penny stock scams, in which the fraudsters purchase large quantities of penny stocks and work to artificially inflate their prices, before selling them off at a profit.
Pump-and-dump scammers often use telemarketing tactics, such as boiler room cold calling tactics, and spread misinformation about companies in order to boost share prices to certain levels. Once they sell off their large stashes of the inflated stocks, prices drop back down and unsuspecting investors have to sell at a loss.
How To Avoid Pump-and-Dump Trading Scams
Though there are legitimate tactics for making money off of penny stocks, these are best left to experienced day traders. The majority of pump-and-dump trading scams revolve around penny stocks, and it’s hard to know whether or not such low-value companies are legit investments. There are plenty of other reputable companies out there with affordable stocks, so stick to trading those in order to avoid pump-and-dump investment scams.
Chop Stock Scams (Penny Stock Scam)
Chop stocks is a term used to refer to a tactic that scammers and brokers use to increase the value of penny stocks. In this particular trading scheme, scammers pay fraudulent brokers under the table to push certain penny stocks to their clients in large numbers. The more people buy them, the higher the prices go, and the scammers eventually sell them off for large profits. The brokers receive flat fees from the scammers and/or commissions on the trades.
How To Avoid Chop Stock Scams
Again, the best way to avoid any type of penny stock scam is to avoid trading in penny stocks. It can be very difficult, especially for inexperienced investors, to spot things like chop stock scams. However, there are some red flags to look out for, such as a broker who is very pushy about selling you penny stocks for a company you’ve never heard of.
Dump-and-Dilute Scams (Penny Stock Scam)
Dump and dilute stock market scams involve companies repeatedly issuing more shares for the sole purpose of getting more money from investors, with no intention of actually using the money to raise the value of the company for investors. Companies that partake in this type of fraud often reverse split their stocks, meaning they convert each share into a fraction of a share. This makes it appear as if the shares are worth more to investors.
How To Avoid Dump-and-Dilute Scams
Be wary of any business that constantly releases more shares, and be aware of how reverse splitting stocks actually affects the value of shares. If you notice a company using these tactics, do not buy shares in them. Make sure that the value of any stocks you’re considering buying is actually supported by the company’s activities and financials.
How a Chargeback Can Help You Recover From a Stock Trading Scam
A chargeback is a process by which you can dispute fraudulent charges to your credit or debit card through your bank or another card issuer. In such cases, your card provider’s fraud and loss prevention department reviews all the evidence and information you provide them and, if they approve your chargeback request, returns the stolen funds to your cards.
For the highest probability of successfully retrieving your funds after falling victim to a stock trading scam, consider contracting the services of a chargeback company. These fund recovery specialists have processed thousands of cases just like yours, with high rates of success. If a chargeback doesn’t work, fund recovery teams also have other ways they can track down and pressure scammers into returning some or all of your money.
