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What You Need to Know About Pump and Dump in Stocks

23 Sep 2023

Pump and Dump is a scheme that manipulates the price inflation of a stock through false information and exaggerated hype, only to sell it off at a profit, leaving unsuspecting investors in the dust. 

In this blog, we will discover the daggers of Pump and Dump, explore how it works, and provide you with essential tips to protect yourself from falling victim to this fraudulent tactic. 

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What is Pump and Dump?

Pump and dump scans involve artificially inflating the price of vulnerable stocks through deceptive promotions, only to sell them off once their value skyrockets. This fraudulent practice often leads to significant losses for unsuspecting investors. 

It is essential to note that small-cap stocks are particularly susceptible to these schemes. So, investors should exercise caution when encountering suspicious hype. 

How does Pump and Dump Work?

Pump-and-dump schemes, once conducted through cold calling, have evolved with the advent of technology and the internet. This practice consists of two stages: the pump and the dump. 

Fraudsters use online messages to entice investors into buying a stock quickly, often by claiming access to confidential information. Once the stock price rises, the perpetrators sell their shares at a high rate, leaving new investors at a loss if the price subsequently plummets. 

Small-cap stocks are the primary target due to their susceptibility to manipulation. The scammers artificially increase demand to inflate stock prices before selling for short-term gains. While the specifics may vary, the underlying principle remains the same: manipulating supply and demand to deceive investors.  

How to Avoid Pump and Dump in Stocks?

If you want to protect yourself from stock price manipulation and avoid financial losses, you should be well aware of the methods to identify and prevent such practices:

  1. Regulatory bodies like the SEC provide valuable tips and advisories to help investors stay informed and avoid being defrauded. It is crucial to review these resources. 
  2. It is essential to educate yourself about the stock market through videos, seek guidance from trusted individuals like brokers or experienced long-term investors, and verify the credibility of information sources. 
  3. You should also know how to identify fake calls and emails, particularly related to micro-cap stocks, and verify information with reliable third parties. 
  4. Lastly, pay attention to official reports and announcements from companies and report spam messages to the SEC. 

Conclusion

Remember to be cautious and sceptical when encountering investment opportunities that seem too good to be true. Question the motives behind unsolicited stock tips and avoid expecting significant and rapid returns. Conduct thorough research before making any investment decisions to avoid any type of pump-and-dump scams. 

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account 

 

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