Lithium investing – Be careful! The “pump and dump” guys are back.

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Image: Lithium Mining, Brine ponds, Silver Peak, Nevada, NASA/GSFC/METI/ERSDAC/JAROS, and U.S./Japan ASTER Science Team

As everyone is now aware, Lithium is more than a mood-stabilizer, it’s a key component in the latest lithium-ion batteries being produced for electric cars such as Tesla, Chevy and Toyota.

In fact, Tesla is so committed to this power source that it’s in a joint venture with Panasonic, with their “Gigafactory” located at Sparks, NV. This is a massive corporate partnership designed to drive down the cost of these long-range battery packs, the ones that go in cars as well as the ones that power entire buildings.

The auto industry is leaping on the bandwagon and trying to bring as many electric cars to market as it can, both at home and abroad. And with more and more calls for “zero emissions” power from states like California, there’s been a growing interest in investment in Lithium mining stocks.

Pump and Dump warning

Which brings out the “pump and dump” guys. These are companies that masquerade as being long-term players in a field who swear they are on to a “sure thing” and you’d better get aboard quick before you lose out — because lose out you will unless you invest in this low-priced stock that’s about to soar! Wikipedia defines them: “Pump and dump” (P&D) is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.

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. 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 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.

And if they lure in enough suckers the stock will soar, and when it hits a price pre-designated by the owners, they’ll sell the stock and vanish with their profits leaving investors with worthless paper.

How do I know?

Because I fell for a “Bamboo – Ecological Product of the Future” scam a few years back. They’d bought some penny share company and juiced it with some slick marketing, a few hundred thousand dollars to make the stock look like it had moved, and some fancy paperwork. It was promoted lavishly through a company I used to respect until I discovered it had been paid handsomely to defraud me.

Of course, Lithium is a consideration for serious investors. Because of all the battery potential, the market is very hot right now. Check out the Motley Fool article on the subject: Here. They talk about three particular major stocks that are traded on the NYSE: Albemarle, SQM, and FMC. Note that these are substantial companies. Their stocks prices are in the high tens or even hundreds of dollars. They have been around a while. They have millions, maybe billions in assets and they can afford to explore and take the hits that come with looking for minerals and elements.

Remember, if the company schmoozing you to invest has a low dollar share price – they probably can’t compete with the big guys. They will talk a big game and dress up minor forays into the industry as major moves, but check everything before you take their promises at face value. Check the geography, the potential yield, the news, everything before you invest your hard-earned money in something you don’t absolutely understand or trust.

As The Motley Fool says:

There are a handful of small junior miners and numerous tiny players. They are more speculative, to varying degrees, and most are unprofitable. It takes a massive amount of money, not to mention a long time, for junior miners to go from exploration to profitable production — and the vast majority of them won’t make that transition. Only investors with a high risk tolerance should consider investing in a junior miner.

Beware of the Pump and Dump OTC scammers. Check them out. Click on all the links you can find on the website where they are listed, Google every name you see, follow down every lead, read every word of small print —  and ask ALL these questions:

  1. Are they a member of the NYSE or an officially recognized stock exchange overseas? If not, why not? Why are they overseas?
  2. Where ARE they registered? If it’s on the OTC list, you should know what that means – click here. (Also see above) This is an “over-the-counter” market that links brokers and dealers electronically. If you have ever heard of ‘pink sheets’, this is their home.
  3. Are they registered with the SEC? While it’s a good sign, it’s not proof positive that the company is legit. Keep digging. There are various reporting standards for OTC companies, and not all comply with SEC requirements.  If you’re confused – leave it to an investment professional.
  4. Has their share price made a sudden jump in the past few days or weeks?
  5. What’s their market cap? It should be substantial, not a few dollars or cents a share. Remember, a million or so $1 shares that go up by 5 or 6 dollars will generate a tidy profit for a scammer and is easy to disguise as a loss.
  6. How many countries are they involved in?
  7. How many employees do they have and how transparent is their website?
  8. What is the pedigree of the named players? Have they had small companies that failed before; went into Chapter 11 for instance? Google their names. The big companies will have CEOs and CFOs with substantial profiles, YouTube videos of TED talks, CNBC interviews etc. The sharks that lurk in the shallows will have hazy backgrounds and feature a lot of corporate BS in their Linkedin profile. Drill down and Google research ALL their past companies. You’ll be surprised how many feature “reverse takeovers”, bankruptcies, Chapter 11 announcements, and the big common denominator: no assets remaining for distribution.
  9. Were they involved in the “last big thing” like shale, oil or gas exploration, or my bamboo experience?
  10. Is the source where you learned about the stock being remunerated, or is it impartial? Is it pretending to be impartial? Pump and dumps buy marketing to make them look credible and like to attach themselves to newsletters and associations that offer a cloak of respectability.

Let me know if you’ve ever fallen foul of a P&D – and whether you’re seeing any activity right now?

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