Penny stocks are often used by such fraudsters because these shares are often not traded in the major stock exchanges, can generally be obtained cheaply at pre-pump prices, and can be sold over the counter. Because penny stocks are often quoted in the Pink Sheets (which practically has no disclosure requirements to be listed), and Over The Counter Bulletin Board (which has very little disclosure requirements), market research and background checks about the parent companies are very limited, or sometimes next to impossible.



The operators of the scheme purchase penny stocks and through misleading positive statements, generate interest in the stocks. These statements are more often than not spin and untrue, and have a wide array of means in order to hook potential stock buyers. This could be in the form of supposedly unbiased finance newsletters that would promote the stock as the hot' share to buy right now. Message traffic in chat rooms and electronic bulletin boards may urge potential investors to buy quickly before the prices go down. Sometimes a financial expert radio commentator or TV analyst may mention the stock in their program. Some fraudsters would go as far as setting up company websites for the stock or in some cases, use the existing company website to feature the healthy financial health of the company or a new hot product or innovation that would supposedly make the particular penny stock a hot buy.

These positive statements can be partially true at best, or outright lies at worst, but all those statements are designed to generate interest in the particular penny stock, misleading the public as to the true value and capability of the penny stocks to perform in the open market.

Aside from the positive statements touted through various forms of mass media (TV, radio, newsletters, newspaper columns, web sites, message boards, etc.), penny stocks fraudsters have been using junk faxes before the internet era and with the advent of the internet, they now use spam e-mails that promote buying the penny stocks through misleading and almost unbelievable claims. In addition, there are boiler room call center operations that do a special kind of telemarketing cold calls targeting the elderly, na've, or overseas potential buyers of the pumped up penny stocks.

Due to the misleading positive statements, unwitting investors purchase these penny stocks in droves, driving up share prices through high demand. The people behind the scheme would sell their penny stocks at the pumped up prices, essentially dumping these shares at the unwitting investors. Once the operators of the scheme dump their overvalued shares, and they stop hyping up the stock, the share price falls, and investors lose their money.

These operators would then move on to other penny stocks, and repeat the cycle of pumping and dumping. There are several sorts of variations of the pump and dump, but the methods we mention above are the core activities.