Hurricane season is officially here — and 2017 could produce an above-average number of storms, according to predictions.
What does this have to do with investors? The Financial Industry Regulatory Authority warns against stock scams that tout the promise of huge gains in the wake of the next hurricane or other natural disaster in a new Investor Highlights newsletter.
“In years past, stock promotions touted ‘massive run-ups’ in a stock’s price in the aftermath of the storm ‘as demand to repair homes skyrockets,’” FINRA warns. “You can expect unsolicited faxes and spam about investments that exploit a variety of hurricane-related opportunities.”
According to FINRA, best bets for scams include stocks associated with cleanup or rebuilding and those that purport to take advantage of refinery issues and the rising cost of oil and gas.
Unsolicited text, email and other types of spam about investments that exploit a major disaster frequently include price targets or predictions of swift and exponential growth.
These scams also often include the use of facts from respected news sources to bolster claims of a price run-up – for example that “some percentage of the billions of dollars it will take to rebuild after the hurricane will contribute directly to a company’s bottom line,” FINRA says.
Scams may also mention contracts or affiliations with federal government agencies or large well-known companies. They also often include statements about how much easier it is for low-priced stocks to skyrocket in value in comparison to higher-priced stocks.
FINRA offers four tips to avoid potential scams:
1. Investigate before you invest.
“Never rely solely on information you receive in an unsolicited email, text message or other form of communication,” FINRA states.
It’s easy for companies or their promoters to make glorified claims about new products, lucrative contracts, or the company’s revenue, profits or future stock price, according to FINRA.
2. Do some sleuthing.
FINRA advises that investors find out who is at the controls of a company before they invest.
“A basic internet search is a good place to start,” FINRA says. “Proceed with caution if you turn up indictments or convictions of company officials, or news reports that raise red flags.”
FINRA also suggests trying to contact the company and its personnel because non-working phone numbers and bogus business addresses can often be revealed through a simple phone call or internet search.
3. Find out where the stock trades.
Most stock pump-and-dump schemes involve stocks that do not trade on The Nasdaq Stock Market, the New York Stock Exchange or other registered national securities exchanges. Companies that list their stocks on these registered exchanges must meet minimum listing standards, like minimum amounts of net assets and minimum numbers of shareholders.
Instead, stocks in pump-and-dump schemes tend to be quoted on an over-the-counter (OTC) quotation platform like the OTC Bulletin Board (OTCBB) or the OTC Link Alternative Trading System (ATS) operated by OTC Markets Group. Companies quoted on the OTCBB or OTC Link generally do not have to meet any minimum listing standards.
4. Read a company’s SEC filings.
Most public companies file reports with the Securities and Exchange Commission. Check the SEC’s EDGAR database to find out whether the company files with the SEC, and read the reports to verify any information about the company.
“But remember, the fact that a company that has registered its securities or has filed reports with the SEC doesn’t mean that the company will be a good investment,” FINRA advises.
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