With marijuana now legal in two states, and medical pot okayed in 20, shares of companies selling anything related to weed are being touted as hot stocks. Investing in pot is a good idea, but caution is needed.
Federal regulators are warning some investments could actually be "pump and dump" stock scams. Emails related to such schemes, marijuana-related or otherwise, have spiked in the past year, the Financial Industry Regulatory Authority said recently.
"Spam email is the bait used to lure people into making bad investment decisions," Cameron Funkhouser, executive vice president of the Financial Industry Regulatory Authority's Office of Fraud Detection and Market Intelligence, said in a statement. "No one should ever make an investment based on the advice of an unsolicited email."
Here's how the schemes work: Fraudsters, often paid promoters or company insiders, use email, social media and message boards to drum up interest in stocks with overly optimistic and, in some cases, outright incorrect information. A buying frenzy that ensues, and pushes the low share price upwards ("the pump"). When at an apex, scammers sell off shares, at which point the share price plummets, leaving investors with stock that is basically worthless ("the dump").
"These companies often don't have a lot of outstanding shares," said Gerri Walsh, senior vice president for investor education at FINRA. "Prices get driven up so quickly, but can crash again so quickly."
In order to avoid a fraud, be sure to research before investing cash. Here are some other tips to consider:
• Consider the source. Tread carefully with companies that issue a flood of press releases or other promotions in a short time period.
• Find out where the stock trades. Most unsolicited investment advice involves stocks that trade on over-the-counter platforms, as opposed to national securities exchanges, like NASDAQ or the New York Stock Exchange.
• If a company's stock is traded publicly, then information on the company should be available publicly. Read through the company's filings with the Securities and Exchange Commission. Search the names of key corporate officials, as well as the company itself, and proceed with caution if you find recent criminal indictments, convictions, civil suits or investigations, as well as securities or trading violations.
• Look up the person selling the stock or investment.
• Legitimate investment salespeople must be properly licensed and work for firms registered with FINRA, the SEC or a state securities regulator. To check a broker or investment adviser's background, use FINRA's BrokerCheck site.