5 Ways to Survive Pink Sheet Stocks

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What do Great Wall Builders Ltd. (PINK: GWBU), Vision Plasma Systems Inc. (PINK: VLNX), Raystream Inc. (PINK: RAYS), North Spring Resources Corp. (PINK: NSRSE) and Rarus Technologies Inc. (PINK: RARS) have in common?

They are classic pump and dump schemes which duped a number of naïve traders.

Traders and investors who actively buy and sell penny and micro-cap stocks would be familiar with pump and dump. A pump and dump scheme tries to boost the price of a stock through misleading and exaggerated statements. The executors or the people behind a pump and dump scheme already have an established position in the stock, which is being promoted. Once the hype has led to an increase in stock price, the people behind the scheme sell their positions.

Although the practice is illegal, pump and dump schemes continue in the micro-cap and penny stock universe. One reason why such schemes usually involve micro-cap or penny stocks is because they can be easily manipulated.

A classic and a very recent example of a pump and dump scheme is Great Wall Builders (GWBU). GWBU claimed to own a technology that can reduce vehicle emissions and improve mileage. For months, the stock was pumped with positive developments related to the “technology”. Some penny stock newsletters promoted the stock and one even said that it will retire if GWBU doesn’t hit $2. GWBU peaked at $1.95, which was enough for the schemers to sell their position in the stock. GWBU now trades at $0.0170 and the people behind GWBU are busy promoting some other pump and dump scheme.

Despite these pump and dump schemes, trading in pink sheet stocks can be profitable. Not all pink sheet stocks are pump and dump schemes. Traders and investors just need to pick the right stocks.

So how do you avoid pump and dump schemes and survive trading pink sheet stocks? Here are some tips.

1. SPAM PROMOTIONS: Avoid stocks that are promoted through spam emails. Remember, a genuine company will never promote itself through spam email.

2. MANAGEMENT: Always find out who is running the company. Check the senior management’s involvement with public companies in the past. If there is anyone in the company with links to pump and dump schemes in the past, it is likely that person is once again trying to dupe investors.

3. FALSE CLAIMS: One way pump and dump schemes lure investors is through exaggerated and false claims. When a company says that it acquired a mine that has the potential to generate billions of dollars in revenue in the “future”, or a company says that it owns a “breakthrough technology” that can change the world, chances are they are making false claims. Remember if a company is sitting on a mine that has significant potential or owns a breakthrough technology, it will never promote itself through spam emails.

4. PRICE MOVEMENTS: Another sign of a pump and dump scheme in operation is when you see huge movement in stock price. When a stock moves 400%-500% intra-day on huge volume, it is likely a scam.

5. FINANCIALS: This one goes not just for small companies but any company. Look at the financials. A genuine company will always make its financial performance available to investors, even if it is not required to do so by the SEC. See the company’s assets, how much cash it has on balance sheet etc. For example, if a mining company says that it has $1,000 as cash on its balance sheet, chances are it is out to dupe investors.

By doing these little checks, you can avoid falling for scams.

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