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Pump and Dump – How it works
Full extract of Wikipedia’s page “Pump and Dump“
Pump and dump schemes may take place on the Internet using an e-mail spam campaign, through media channels via a fake press release, or through telemarketing from “boiler room” brokerage houses (such as that dramatized in the 2000 film Boiler Room). Often the stock promoter will claim to have “inside” information about impending news. Newsletters may purport to offer unbiased recommendations, then tout a company as a “hot” stock, for their own benefit. Promoters may also post messages in chat rooms or stock message boards such as ADVFN, urging readers to buy the stock quickly.
If a promoter’s campaign to “pump” a stock is successful, it will entice unwitting investors to purchase shares of the target company. The increased demand, price, and trading volume of the stock may convince more people to believe the hype, and to buy shares as well. When the promoters behind the scheme sell (dump) their shares and stop promoting the stock, the price plummets, and other investors are left holding a stock that is worth significantly less than they paid for it.
Fraudsters frequently use this ploy with small, thinly traded companies—known as “penny stocks,” generally traded over-the-counter (in the United States, this would mean markets such as the OTC Bulletin Board or the Pink Sheets), rather than markets such as the New York Stock Exchange (NYSE) or NASDAQ—because it is easier to manipulate a stock when there is little or no independent information available about the company. The same principle applies in the United Kingdom, where target companies are typically small companies on the AIM or OFEX.