What Is Pump And Dump (Explained: All You Need To Know)

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What Is Pump And Dump

Pump and dump refers to the artificial manipulation of stock price by making false statements, providing misleading information, and exaggerating facts in such a way as to drive the stock price up to make a profit.

In other words, you make false and misleading statements to “pump” the stock price and when the stock has reached the desired value, you “dump” your stocks.

Typically, those who engage in a pump and dump strategy are individuals that already have a stock position in the underlying company and are looking to artificially increase the stock price so they can sell at a profit.

In the United States, pump and dump schemes are illegal and individuals found engaging in such stock price manipulation strategies will be sanctioned and heavily fined.

The pump and dump strategy can be applied to any type of security that is traded, like stocks, cryptocurrencies, or any other securities.

Keep reading as I will further break down the meaning of pump and dump and tell you how it works.

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How Does Pump And Dump Work

A typical pump and dump strategy is to disseminate false and misleading information about a particular stock or security in such a way as to have investors purchase the same.

For example, fraudsters can send a large volume of emails providing false information about a particular company and claiming that investors should immediately invest in it as there will be a major positive announcement coming soon.

Pump and dump perpetrators will try to convince investors that they have access to sensitive information leading them to believe that the company will be making an announcement of some kind that will dramatically drive stock prices up.

Unsuspecting investors will then acquire shares of the company leading to higher trading volumes and an increase in stock price.

As the stock price goes up, other investors take notice and jump on the opportunity hoping to make some money.

However, none of the information provided by the fraudsters was true and investors were deceived into buying the shares of the company.

When the stock price reaches a certain threshold, fraudsters will sell the stock they own for massive profits.

The pump and dump strategy is generally used on micro-stocks, small-cap stocks, and over-the-counter securities as they are more prone to price volatility.

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Pump And Dump 2.0

Traditional pump and dump strategies used to share false and misleading information in the market was typically through cold calling of investors.

However, with the advancement of technology, it is much easier for fraudsters to use the Internet and online platforms to share false information about a particular stock.

This is called the pump and dump 2.0.

In essence, instead of cold-calling, fraudsters will send email blasts, use online platforms to reach out to investors, and convince them that they must buy a particular stock before its price explodes.

Along with the dissemination of false information, the fraudsters will start trading shares of the targeted company so they can show an increase in trading volume.

As this happens, investors may take notice of these variables and start buying the stock.

As this happens, the stock price will go up further.

Eventually, the fraudsters will sell their stock at a high price to make important profits.

Ultimately, when the market realizes that there’s no new information about this company or that no major announcement will be made, the stock price tanks leaving many investors at a loss.

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Pump And Dump 3.0

In recent years, we are witnessing pump and dump schemes applied to cryptocurrencies.

This is known as the pump and dump 3.0.

Since the cryptocurrency market is not properly regulated, there are many fraudsters that take advantage of investors in the cryptocurrency market.

Governments throughout the world advise investors to be cautious and avoid pump-and-dump schemes that are highly prevalent in the cryptocurrency market.

Since there are so many new cryptocurrencies created, it’s easy to use online platforms and social media to create hype around a particular cryptocurrency.

If enough investors buy into the scheme and buy the underlying digital currencies, more investors will buy as well, pumping the value of the coin.

Eventually, the fraudsters will sell their position and reap significant profits.

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Avoiding Pump And Dump Schemes

Let’s look at some ways investors can avoid falling trap of pump and dump schemes.

The first tip is to be very cautious of those who claim to know of great investment opportunities.

You can receive investment opportunity messages by email, on social media, in the mail, on investment research websites, in investment newsletters, on the radio, in magazines, in newspapers, or on your cell phone.

It’s important that you recognize that if you are being targeted by email, many others will be targeted as well.

Generally, someone will not share great advice with others for free or through email blasts, so be careful.

Another aspect to look at is if someone is promising you specific returns or guaranteeing that you will make money.

Generally, investment advisors and professionals do not guarantee returns and will caution investors that they cannot accurately predict the future.

However, pump and dump fraudsters will entice investors to invest by making promises of high returns.

The pump and dump strategy is also used by individuals that are members of an identifiable group.

For example, a person that is a member of your community, church, association, or club may pitch an investment opportunity to you, leading you to believe the statement.

You should be cautious even with individuals that you may know somehow as nobody offers others free advice on how to make a lot of money.

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Takeaways 

So there you have it folks!

What does pump and dump mean?

In a nutshell, pump and dump refers to a type of stock fraud where false information about a stock is disseminated leading to the artificial increase in the stock price allowing the fraudsters to sell for a profit.

Typically, micro-cap and small-cap stocks that have low trading volumes and capitalization are prone to pump-and-dump tactics.

Since you do not have a lot of public information on these types of stocks, anyone sharing false or misleading information can potentially manipulate the stock price.

Generally, the promoters of the stock will purchase shares of a microcap company or small-cap company, then pump the stock price by disclosing false information, and ultimately sell when the stock price goes up.

Now that you know what the meaning of pump and dump is in stock trading and how it works, good luck with your research!

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