Pump and Dump
What Is a Pump and Dump?
A pump and dump scheme is a form of market manipulation where fraudsters artificially inflate the price of a stock by spreading misleading or exaggerated information. Once the price rises due to increased demand, the perpetrators sell their shares at the inflated price.
After the fraudsters sell their holdings, the stock price typically collapses, leaving other investors with losses.
Why It Matters
Pump-and-dump schemes distort financial markets and harm investors who unknowingly purchase inflated securities. These scams are often associated with small or thinly traded stocks, though they can occur in other markets as well.
Understanding these schemes helps investors avoid falling victim to manipulation.
How Pump and Dump Schemes Work
Fraudsters typically:
- acquire large amounts of a low-priced stock
- promote the stock through misleading claims
- encourage investors to buy shares
- sell their shares once the price rises
After the fraudsters sell, the stock price often drops rapidly.
Example
A group promotes a small company’s stock on social media, claiming it will soon skyrocket. As investors buy shares and push the price higher, the promoters sell their shares for profit.
Pump and Dump vs Legitimate Promotion
- A pump-and-dump scheme involves spreading false or misleading information.
- Legitimate promotion involves accurate disclosures and transparent analysis.
FAQs About Pump and Dump
Where do pump-and-dump schemes occur?
Often in low-volume or small-cap stocks.
Are pump-and-dump schemes illegal?
Yes. They violate securities laws.
How can investors avoid them?
By researching investments and avoiding hype-driven promotions.
Related Terms
