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Short and Distort Stock Scams
Short and Distort scam involves short selling a stock while smearing the company with rumors to drive the stock's price down
If you know what the pump and dump scheme is then consider this the inverse of that classic stock market scam. In a pump and
dump scheme individuals or a group of people will create unwarranted hype about a worthless stock so that they can drive
it's value up and then sell their holdings leaving everyone else with a bunch of worthless penny stocks. Pump and dump scams
are usually more effective during a bull market because investors are easier to fool when the majority of stocks are increasing
in value. In bear markets the opposite can happen. It becomes easier to convince investors that a stock is overvalued and
that it is about to lose value. Add to this the fear of Enron-style collapses and you have a large number of investors ripe
for a duping by a short and distort scheme. We are going to explain how short and distort schemes work so that you are less
likely to fall into this trap.
What is short selling or shorting a stock?
Short selling is stock market lingo for selling a stock that you don't own in the hopes that it will decrease in value. While
stock purchases are usually made in the hopes that the value will go up, when you short sell a stock you have also made a
committment to purchase it back at a later date. If the stock loses value you will have sold it "high" and bought it back "low"
which is, as we all know, the mantra of all stock traders. In other words, stock was borrowed temporarily at a high price and quickly
sold with the promise made that the stock will be purchased later. So if the stock goes down in price you can keep the difference
between the high and low price. This is an extremely risky stock trading strategy since you are locked into purchasing the stocks
at a specific price. If the stock didn't go down in price or even increased in value you could lose a considerable amount of money.
The intention of the short and distort scam is to minimize or eliminate the risk that a stock won't decrease in price.
The Short and Distort Scam
The short and distort schysters try to profit by stimulating fear. They will use online screen names that imply either that they are associated with the SEC or the National Association of Securities Dealers, or that they can regularly spot worthless stocks. Their goal is to convince investors that every proponent of the stock has ties to the company and that the SEC is watching and will halt the stock. S & Ds also intimate that they are looking out for investors' interests. Short and distort players clutter message boards, so optimistic information cannot easily be found. "Get out before it all comes crashing down" and "Investors who wish to enter a class action lawsuit can contact..." are typical posts, as are their projections of $0.00 and loss projections of 100%. If their strategy is suspected by "longs", they attack the person that has caught them. The market manipulator will do everything in his/her power to keep buyers out of the stock and keep the price heading south.
The net effect is that the investors who initially bought stock at higher prices sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective distortion campaign. At the same time, the people running the short and distort operation cover at low prices and lock in their gains. This can be disasterous for for the company who's stock was smeared as well as all the investors that fell for it.
Here are a few tips to help you avoid short and distort schemes:
- Do not believe everything you read - verify the facts.
- Do your own due diligence and discuss it with your broker.
- Hypothecate your stock - prevent the short sellers from borrowing and selling it.
Short and Distort Investment Scam Links:
Short and Distort: The Less Publicized Sister of the Pump and Dump
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