Stock Investment Schemes - The Short and Slam

This stock investment scheme involves short selling a stock while slamming the company with bad rumors to force the price of the stock down.

This fraudulent stock investment scheme is the exact opposite of the classic pump and dump scheme. In the pump and dump scheme, perpetrators of this scheme will aggressively promote a penny stock so that they can jack up the price of the stock and then sell their holdings leaving everybody else holding a bunch of worthless stocks.

During a bull market, this scheme is very effective because investors easily succumb when the majority of stocks rise in value. In bear markets, the opposite can occur. Investors are convinced that stocks are overvalued and will lose value.

What is short selling of a stock?

Short selling is a stock market terminology for selling a stock that you do not own with the hope that it will go down in value. While stock purchases are done with the hope that the value will increase, when you short sell a stock, you have the intention to buy it back at a future date. If the stock decreases in value, you have sold it "high" and bought it back "low." This is how all stock investors make money. Buy "low," sell "high" or sell "high," buy "low." Simply put, you borrowed a stock temporarily at a high price and quickly sold it. At some time in the future after you sold it, you go ahead and buy it back hopefully at a lower price to collect a profit. Short selling is a very risky stock trading strategy since you are locked into buying the stock at a specified price. If the stock did not go down in price as you wanted, but instead went up in price, you lose money. The purpose of the short and slam scheme is to minimize the risk that the stock will go up in value.

The Short and Slam Scam

Shysters of this scam attempt to profit in this type of investment fraud by promoting fear. They will use online screen names that imply that they are associated with the NASD or the SEC or that they are experts in locating worthless stocks. Their objective is to convince investors that every advocate of the stock is associated with the company and that the SEC is maintaining a watchful eye and will halt the stock. Short-and-slam shysters will pretend that they are looking out for the investors' interests. These perpetrators will post bad information about a company on message boards such that information favorable to the company will be obscure. Such postings include "Sell your holdings before the price goes down" and "Investors who want to enter a class action lawsuit can contact." The market manipulator will do everything he could possibly do to keep the buyers out of the stock and keep the price going down.

The net effect is that investors who bought stock at higher prices in the beginning sell at lower prices toward the end because of their false assumption that the stock is junk. Simultaneously, perpetrators of this scam cover themselves at low prices and lock in their profits. This has a bad effect on the company whose stock was bad-mouthed as well as all the investors who succumbed to this scam.

There are lots of investment fraud schemes out there such as the short and slam scam. It is up to you to educate yourself to recognize what is and is not legitimate. By doing so, you can minimize becoming a victim to the crime of investment fraud.

Fabiola Castillo is an online marketer for the website NinjaCOPS.com. This virtual store specializes in personal defense products where you can buy Mace pepper spray, kubaton keychains, hidden video cameras, cheap stun guns, nunchaku tricks videos, telescopic steel batons, and many other home security products.