How to Avoid a Web Stock Scheme

Federal officials charged 11 longshoremen with orchestrating a $7 million online stock scam on Tuesday.

The defendants allegedly used more than 15 websites, including Facebook and Twitter, to promote penny stocks and then take advantage of increases in price and trading volume to turn a profit. The scheme, commonly referred to as a “pump-and-dump,” isn’t exactly a new trick, but the use of social media definitely helped the accused longshoremen cast a wider net.

“Social networks can spread a scam faster than typically in the past,” certified financial planner Katherine Holden says, adding that these networks, while not inherently the problem, allow scammers to sucker in their targets at a much faster pace. At the same time, information about a bogus deal also travels faster on such networks. Regardless, more people fall for the scam than you may think.

“People fall for this stuff for the same reason they buy lottery tickets,” Jim Heitman, a financial adviser with Compass Financial Planning, says. “Easy money sounds like, well, money that comes easy.“

How can the average person protect themselves from being enticed by similar schemes? MainStreet consulted experts affiliated with the National Association of Personal Financial Advisors to find out.

Be wary of making stock picks through social networking sites.

All stock suggestions should be handled with care. However, those obtained through social networks should inspire diligent fact-checking.

“Stock tips in 140 characters or less really should be viewed with suspicion, especially true if the stock price in pennies is less than the number of characters in the tweet,”  Heitman says.

If you liked this article you might like

When a Credit Union Is Your Best Card Option

3 Signs a Rewards Card Will Really Reward You

10 Simple Ways to Avoid College Debt

10 Tips to Skirting Sky-High Airfare

10 Items to Stop Paying For Once You Have Retired