What is Pump and Dump in Stocks?

What's a pump and a dump?

Pump-and-dump fraud encourages investors to purchase shares in a company in order to artificially increase their share price. This can be used to increase the stock's price by making misleading or false recommendations. Pump-and-dump traders make use of social media platforms and messaging apps to spread misinformation or hype in order to increase the price or start rumours. The promoters will sell the stock when the stock's price has risen.

What is pump and dump?

Cold calling was traditionally used to pump and dump. It is now easier to do this with the advent of new technology and internet access. This scheme has two parts.

Pump: Fraudsters post online messages encouraging investors to purchase stock quickly, claiming that they have confidential data.

Dump: When the price rises, the perpetrators will sell their shares at an extremely high rate. If the shares are sold, new investors lose their money.

Because they are easy to manipulate, pump and dump schemes mainly target small-cap stocks. This type of shares are only limited and can be traded over the counter. Only a few buyers are required to push the stock price. Stock prices rise rapidly due to this new inflow of buyers. To make a significant short-term profit, traders will sell their shares once the stock price has risen. Although each scam is different, the basic principle of the pump-and-dump scheme is the same: changing the supply and demand for a stock.

Pump and Dump

Anyone can participate in the pump and dump scheme if they have access to an trading account. A trade is a large purchase of stock with a low trading volume. This can increase the share's price. The price can rise, attracting other investors to purchase these shares. The trader can sell his shares at any time for a substantial profit.

What types of Pump and Drain Schemes are there?

Fraudsters may use a variety of pump-and-dump schemes:

1. Pump and dump classic scheme

This involves manipulating information about a company and its stock via phone, fake news releases and distribution of "inside" information that could boost the stock price.

2. Boiler room

One small brokerage company employs several brokers who use deceptive sales techniques to sell investments to investors. Cold calling is how the brokers sell stocks. They will sell as many shares of stock as necessary to increase the price. The brokerage firm makes a large profit when the stock price increases.

3. "Wrong number" scheme

Insider investments may result in voicemails. Fraudsters may try to convince you that voicemail was sent accidentally. This is done to draw attention to a stock and increase demand.