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.