For those who are unaware of the classic Pump and Dump scam, we thought a quick primer is in order. Don't be surprised if the following scam rings true with some experience that you might have had with a penny stock.

Phase 1: Preconditions. For purposes of this scam, you need a worthless stock, with a tight float and which is thinly traded. Small or microcap companies are needed as a precondition to this scam. Tight float means that most of the stocks are held by insiders and promoters and not by the general public. The reason for this is that it is much easier to manipulate the price of the stock when there are fewer stocks held by the general public since fewer buying of stock is needed to increase the price.

Phase 2: The Front Load. The manipulator buys stock of an otherwise worthless stock at low prices. This sets the stage for the manipulator to make money when the stock price elevates.

Phase 3: Behind the Scenes Promotion. The manipulator will now start a promotional campaign to create interest in the stock. This is done in a number of ways. Promoters use advertising campaigns, cold calls, newsletters, newsgroups, message boards, chat rooms, emails and any other method to promote the stock. The information that they use is usually rumour and not fact. They try to entice the average investor with visions of making the big score, quickly and without much risk. The promoters will tour investor roads shows to drum up excitement. Essentially, the promoter is playing on the investors' strings of greed to try to make the investors feel that he can't miss the next great investment play. With the advent of internet, today's promoter has a larger array of tools at his or her side to mislead the public than years of past.

Phase 4: The Pump. Promoters now will attempt to inflate the price of a stock. This is acheived in one of two ways or a combination of both. Because the stock is thinly traded, promoters and insiders can quietly raise the price by buying up the stock. In other words, instead of putting bid offers at lower prices, they take the ask bids out and go up the price ladder. Since there is little public float, it doesn't take a lot of buying to get the price up.

The second method is to get the price up on promotion. With little public float, a little bit of buying will result in the price elevating.

Phase 5: The Dump. Once the price is at a sufficient level, the promoters sell their own stock during the promotion campaign to unsuspecting buyers.

Phase 6: The Loss. Once the promoters have sold their entire position, the promotional campaign stops. With no new buying coming in, the price of the stock plummets. With no new news, there is no reason for new buyers to come into the market. At some point existing buyers figure out that the stock is worthless and they sell at whatever price necessary to recover any amount of their original investment. The stock price then spirals down or in most cases drifts down to oblivion with unsuspecting investors losing a great deal of money.

Some investors try to outsmart the promoter by trying to get in early enough to buy the target stock at low prices and make money, like the promoter, when the price rises. It is very difficult to time the market since the investor will not know at what stage the promotion is. Our advice: Don't play with fire.If you are an unsophisticated investor, stick to the more senior, larger cap securities about which there is more credible information.

What to do?

To avoid being the victim of the Pump and Dump, keep in mind the following:

- Beware of unsolicited email or telephone calls. Only deal with people you know. If you have any questions about a penny stock, call your broker who can assist you in learning more about a stock.

- Don't make hasty decisions after speaking with a promoter or after hearing a tip.

- Don't believe any promise of great profits at no risk. No investment can deliver guaranteed profits at no risk.

- Don't believe in claims of inside information.

- Do your own research. Look at any recent press releases of the company and take the company at face value.

- Just say no to risky companies. There are plenty of legitimate companies that offer growth without great risk.

- Be true to yourself. Know what your tolerance to risk is and how much you are willing to invest and lose. If you invest in a penny stock be prepared to lose everything.

- Be leery of what you see posted in newsgroups, chat rooms, message boards and what you find in your email box. The promoter will try to use any method of communication to sucker you into his scheme.

- Don’t believe everything you read in investment newsletters. Writers of many newsletters are paid by the companies about whom they are writing. Check the disclaimers at the end of the newsletters to determine if they are being paid by the company they are recommending. The law requires that writers disclose any compensations that they have received.