While seasoned investors might be familiar with pump and dump schemes, they are still out there and they still find a way of leaving a lot of traders holding the bag.

With this manipulative scheme, pump-and-dumpers will find a way of boosting a stock’s price by means of fake recommendations.

This practice is illegal under securities law and if found can lead to some pretty heavy fines (but that has never stopped people from trying).

How does a pump-and-dump work?

The way a pump-and-dump works is actually quite straightforward. In fact, the reason why it keeps happening successfully is probably due to its simplicity.

Usually, these schemes would focus mainly on micro-caps and/or small-cap stocks but they quickly found their way into the cryptocurrency industry.

So, first off, whoever is planning to pump-and-dump stocks must establish a position in that company’s stock.

Then, since the idea is to sell their position at a higher price, pump-and-dumpers will hype the stock as much as possible and by any means necessary.

This means that social media boards will get flooded with greatly exaggerated claims about the company, “rumors”, and other false and misleading exacerbated statements.

How do pump-and-dumps get spread?

Before the advent of the Internet, pump-and-dump schemes were often done via cold calling people.

However, nowadays, there has a been a clear shift into the online world as thousands of emails or message board posts can be spread instantly in hopes of finding unsuspecting targets and entice them to make haste and buy a specific stock.

As you can very well see on many social media platforms, these posts will contain false claims.

Typically, the original poster will assure other users that he has access to privileged information, either posing as an insider or with access to juicy insider leaks.

By doing so, the pump-and-dumper will attempt to earn the trust of other users and may even try to fabricate evidence of his claims.

How do people buy into pump-and-dump schemes?

The answer lies on the very next step of this scheme: creating “FOMO” (fear of missing out ).

After assuring the crowds that their source is good, the info itself will almost always be about a company’s imminent development which is just about to lead to an inevitable and dramatic price upswing.

That’s when they go in for the kill

As buyers begin to jump in, the stock’s price will obviously start to move up.

As buying pressure builds up and the price reaches the pump-and-dumpers desired target, they proceed to sell their shares and close out their position.

In the process, the price will begin to take a significant tumble or even drop dramatically and, whoever fell for the scheme will get left holding the bag.

Which stocks do pump-and-dump schemes target?

The most commonly targeted stocks are micro-caps and small-caps on OTC exchanges due the less restrictive regulations. They do so because those are easier to manipulate given their small float, limited company information, and very low trading volume.

Cryptocurrency Pump-and-Dump

Crypto pump-and-dumps are becoming increasingly prevalent. As the crypto space still lacks regulation , it is important to be on the lookout especially when dealing with new coins or thinly traded ones.

How to avoid pump-and-dump schemes?

First things first: trust no one and do your own research.

By being extremely wary of unsolicited investment advice and doing your own research you will grow healthier investment habits.

Throughout your investment journey you will certainly be met with dubious investment opportunity pitches in many different communication channels.

Ignore them, stick to your own strategy, and remember to keep an eye out for the pump-and-dump’s obvious red flags:

  • ·Being pressured to buy right now as it is about to shoot up
  • Investment proposition which sounds too good to be true
  • “Guaranteed” returns
  • Affinity fraud: schemers often prey upon users of identifiable groups, whether that’s online or in real life (examples include: a specific subreddit, the elderly, religious communities, and so forth).

Wrapping up

In a pump and dump, all you ever see is hype.

Fundamentals are simply out the window and hype is all that matters.

Since the first in make the most, it pretty much works as a Ponzi scheme for stocks.

So, if you see it happening, think to yourself: is it worth taking a chance?