Originally published on Nov 10, 2022
Recently, I received a telegram message about someone losing USD40,000 in a pump-and-dump stock scam.
He was not the only victim.
I opened up the daily price chart of 2195.HK (Unity Enterprise) to study this pump-and-dump scam in action.
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| Daily price chart of 2195.HK (Unity Enterprise) |
The pump in 2195.HK started around the middle of March 2022 at the price of HKD0.30. The stock was then pumped up to a gain of 423% in the next 6 months. As the price runs up, it gets easier to make victims believe false good news spread by scammers about the company and induce the victims to join in the pump. Victims will make money initially, and then they put in more money, further pumping up the price. On the fateful day(29 Sep 2022) of the dump, the stock hit an intra-day high of HKD1.26, then crashed to close down at HKD0.25 at extremely high volume. It crashed by 78.63% within a day! The victims lost everything.
If you zoom into the 5-minute price chart, you will realize there is no time to react even if you are monitoring the stock very closely.
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| 5-min price chart of 2195.HK (Unity Enterprise) |
The stock crashed 78% within 5 minutes from 1550hrs to 1555hrs. Most of the day's trading volume was concentrated within that tiny 5-minute window and that day's volume happened to be the highest in the stock's trading history. I believe the scammers analyzed Level 2 market data and determined that the bid volumes at the prices below the last done price before the dump were enough to absorb the dump within that short 5 minutes.
Investors who set a stop loss at an appropriate price should be able to exit with a better price but I expect the slippage to be terrible.
Stop-loss orders are good for investors who are too busy to monitor the markets but know at what price they want to exit. Suppose you bought a stock at $10. You want to sell the stock at $9 if it falls below this price to manage your risk. You can use a stop-loss order to set the exit price at $9 and if the market hits the exit price, the system will automatically sell your stock at $9. Sometimes, there will be slippage and you will get a worse price. The worst slippage happens when the stock is dumped fast and furious, like in the pump-and-dump 2195.HK crash.
Not all brokers support stop-loss orders, so make sure your broker supports it. I use stop-loss orders frequently myself.
Moomoo is one of the brokers who support stop-loss orders.
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| https://www.moomoo.com/community/feed/103167817613317 |
I am using this example to illustrate the use of a stop-loss order. Please do not get the wrong idea that stop-loss orders will protect you if you hold a pump-and-dump stock.
When it comes to pump-and-dump stocks, the best policy is to avoid them.
I have received several private messages from strangers on telegram whom I suspect to be scammers. I usually ignore them but on a few occasions, I engaged them to experience how these scammers operate.
The picture in their telegram profile is usually a beautiful woman to capture your attention. When a beautiful woman approaches you, you will at least entertain her for a while even though alarm bells are ringing inside your head.
Nowadays, it is easy to use AI(artificial intelligence) to generate pictures of beautiful women who do not even exist today. Here is an example.
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| Picture of a beautiful woman generated by AI |
At the rate at which AI technology is progressing, we will be seeing picture-perfect gorgeous online scammers soon.
The scammers usually start by asking you questions to find out whether you fit their profile of a victim. They want to spend their time productively by choosing the right targets.
About 2 years ago, one scammer on telegram, let's call him S, asked me whether I am into stocks and if I invest in Hong Kong stocks (the pump-and-dump stock he recommended was a HK stock). I said yes, and S proceeded to recommend me a great teacher who has been sharing great stock tips. S said he has gotten rich from the generous sharing of this wonderful teacher. (He is appealing to his victims' greed and hope that they can become rich like him too). S kept persuading me to join a chat group created by the teacher. (It is easier to manipulate your mind in a group setting when different individuals say the same thing. Most of us do not want to be the odd one out in a group so that we can fit in socially). I suspect there will be several people in the group pumping the same stock and persuading me to join in and poking me if I did not. I did not join the group because I did not want to expose myself to an environment that makes me vulnerable to manipulation.
S gave me a stock tip and advised me to buy 0804.HK buy before the price shoots up. The stock did rise initially. So, if I had acted on his tip, I would have made some money initially. Luckily, I did not because the stock suddenly crashed over 22% one day (23Sep2020) and went on crashing another 33% in the next 4 days. It is now down about 86% since Sep 2020.
Some tips on avoiding pump-and-dump stock schemes
- Be on the alert when a stranger sends you a private message offering you tips on what stock to buy.
Why should a stranger share secrets to help you get rich free of charge? If an investment is a high-probability win, he will keep it to himself and buy all he can himself. Why share it with strangers and dilute his own gains? - A pump-and-dump stock is usually illiquid because illiquid stocks are easier to manipulate. It seldom has more than USD0.5m 50-day average turnover.
- A pump-and-dump stock is usually a low-priced stock because they tend to be less liquid and easier to manipulate. Low price means below HKD2 for HK stocks and below USD5 for U.S stocks. Be careful when a stranger online offers tips on stocks that fall into these low price ranges.
- The business fundamentals are not impressive to justify the pumped-up price. When the price of a stock goes up a lot, the sales and/or income trends are usually also upward. This is not the case for the pump-and-dump stocks I encountered. Take 2195.HK for example. The revenue has been in a downward trend over the past 4 years.
2195.HK past annual revenue.
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| 2195.HK past annual net income |
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| 2195.HK past annual operating cashflow |
Most victims met the pump-and-dump scammers through social media or messaging apps. Please remain vigilant in your online interaction with strangers.
The stock research data (price charts, financial statements) used in this article is available free of charge to all moomoo customers using the moomoo app.
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