Warning to new share investors: Beware pumpers and dumpers

·3-min read
A investor looks at share price monitors through the window at the Australian Stock Exchange.
The fastest-growing age group among investors is 25-40. (Source: Getty)

The watchdog for investors and savers is concerned about young or novice investors in the stock market being misled by “pumpers and dumpers”.

It comes as younger Aussies are really getting into stocks to make money, to save for a deposit to buy a house or just for a thrill.

In September, the Sydney Morning Herald reported, “About 46 per cent of Australians – or 9 million people – now hold investments other than their primary residence or superannuation, according to the Australian Securities Exchange’s 2020 Australian Investor Study”.

The fastest-growing age group was 25-40 years of age, and 23 per cent began investing in the past two years, the report found.

And stock market passion is growing, with 900,000 more forecast to start buying shares in the next 12 months.

What is 'pump and dump'?

And because of this rapid rise in new investors, the Australian Securities & Investments Commission (ASIC) is concerned about social media posts being used to coordinate ‘pump and dump’ activity in listed stocks, which may amount to market manipulation in breach of the Corporations Act 2001.

“Pump and dump activity occurs when a person buys shares in a company and starts an organised program to seek to increase [or ‘pump’] the share price,” ASIC said.

“They do this by using social media and online forums to create a sense of excitement in a stock, or spread false news about the company’s prospects.

“They then sell [or ‘dump’] their shares and take a profit, and other shareholders suffer as the share price falls.”

This is a version of market manipulation and it’s illegal. It can attract a fine of more than $1 million and up to 15 years’ imprisonment, but I have noted a worrying trend where certain websites give stock tips and then make it easy for someone to simply click onto an online broker to make the purchase.

This makes stock market speculation a little too easy, and as someone who gives stock analysis, I’m concerned that this kind of short-tip-and-easy-stock-purchase facility makes investing more like gambling.

Stock market no place for gamblers

I love the stock market but it should not be treated like punting, unless you’re happy to lose your money - which is the deal when you show up to the four-legged lottery at Royal Randwick or Flemington.

My young colleague who films my stocks TV program says his mates like the show but they don’t want the analysis of why we like or don’t like the stock — “they only want the tip”.

Many newcomers to stocks could be accessories before the fact when it comes to the crime of being misled into totally inappropriate investments, or more correctly, speculations.

My tip is more boring than the pumpers and dumpers but it will give you good wealth over time.

The tip goes like this:

  1. Buy quality companies when the stock market is taking a set against them

  2. Wait and be patient

The stock that fits that bill now is BHP, as this chart shows.

A graph showing the growth of BHP
(Source: supplied)

Expert analysts think this stock has 15 per cent upside but Macquarie thinks there’s a 36.38 per cent upside over time.

The experts and I could be wrong, but at least you will be holding a great quality business that will reward you in the future.

That’s how stocks make you wealthy.

And this long-term chart of BHP proves it.

A graph showing the growth of BHP.
(Source: supplied)

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