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Here's how it works: A company's web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings -- or, more often, spam -- may urge readers to buy the stock quickly.
Unwitting investors purchase the stock in droves, creating high demand and pumping up the price. But when the persons behind the scheme sell their shares at the peak and stop promoting the stock, the price plummets, and investors lose their money.
Fraudsters frequently use this ploy with small, thinly traded companies -- known as "penny stocks," and generally traded on the over-the-counter bulletin boards, rather than on the larger exchanges like the NYSE or Nasdaq -- because it's easier to manipulate a stock when there's little or no information available about the company. [1]
A good example of how this works can be seen in the movie Boiler Room.
Elements of this page are taken from publications of the United States Securities and Exchange Commission and are not subject to copyright.