The Pump and Dump Scam: What Is It?
A two-part manipulative scheme is known as a pump-and-dump. First, the stock price artificially inflates through fraudulent and deceptive suggestions in the pump phase. Selling or dumping the shares at an inflated price is the dump portion. Let’s use an illustration to clarify.
A Pump and Dump scam illustration
Let’s say that an operator has 50,000 shares in a company for Rs 10 each. In his mind, a pump-and-dump operation makes sense.
He will first begin disseminating false information about the business. He might predict, for instance, that the company will be awarded a $100 million contract the next week or that an industry titan will buy it. None of this news is accurate. Next, however, he plans to raise interest in the stock. More people will begin purchasing firm shares as word gets out. The share price will increase gradually by 20, 30, or even 100% over a short period.
How are the pump and dump carried out?
Cold calling was the usual method for pump and dump. However, it is now more accessible because of modern technology and internet availability. This plan consists of two parts:
Pump: Scammers use internet messaging to persuade investors to acquire a stock rapidly by pretending to have access to private information.
Dump: The offenders dump their shares at a high pace as soon as the prices rise. If prices significantly decline after the traders sell their shares, new investors will lose their money.
Small-cap stocks are the primary target of pump-and-dump schemes because they are simple to manipulate. Since so few shares of this kind are traded over the counter, just a small number of new investors are required to raise the price of a stock.
What kinds of Pump and Dump Schemes are there?
The many pump-and-dump strategies that con artists could employ include:
- Traditional Pump and Dump Strategy
This strategy comprises disseminating “inside” information that can raise the stock price, fabricating press releases, and manipulating data about a firm and its stocks over the phone.
- Boiler room
Several brokers are employed by a small brokerage businesses to sell investors’ investments using unethical sales techniques. Brokers use cold calling to sell stocks. To raise the price, they sell as many shares as possible. The brokerage business sells its share of shares for a healthy profit after the stock price increases.
- Scheme for “wrong number.”
With an insider investment, voicemails could be left for you. The con artists attempt to give the impression that you unintentionally received a voicemail. Instead, it is a deliberate effort to draw potential investors’ attention to a particular stock and increase demand for that stock.
FINAL OVERVIEW
Pump-and-dump artificially inflates a company’s share price and then profitably withdraws from the market just as the price is about to fall.
It is a prohibited and unethical activity, and offenders are frequently subject to sanctions from the Securities and Exchange Commission (SEC). In addition, the police can charge an offender under various statutes.
Although each pump and dump system has unique details, they are all fundamentally based on the same principle: varying stock supply and demand.
