Pump and Dump schemes are a type of financial fraud that is becoming increasingly common in today’s markets. To understand how these schemes work, and how to protect yourself, it’s important to know what a pump and dump is, how it works, and who the victims are.
What is a Pump and Dump Scheme?
A pump-and-dump scheme is a type of stock market manipulation. It involves artificially inflating the price of a stock, often through false or misleading positive news stories, social media promotions, and hiring influencers to promote the stock in order to “pump” the stock’s price. The perpetrators of the scheme then “dump” the shares, usually at a much higher price than they bought them for, profiting from the pump.
History of Pump and Dump Schemes
Pump and dump schemes have been around for many years. They were first used in the early 1900s, but have become increasingly common in the 21st century. The internet has made it easier for perpetrators to spread false news stories and manipulate stock prices.
How Does a Pump and Dump Work?
Pump and dump schemes typically involve 4 steps. First, the perpetrators identify a target stock that they believe they can manipulate. They then buy up large quantities of the stock, pushing up the share price. Next, they use false and misleading information to spread positive news stories about the stock, as well as hiring influencers to promote the stock. This “pumps” the price of the stock, leading to more people buying it. Finally, the perpetrators “dump” their shares at a much higher price than they bought them, pocketing their profits.
Who Are the Victims of Pump and Dump Schemes?
The victims of pump-and-dump schemes are typically retail investors. Retail investors are individual investors who purchase shares of stock on their own.
How Can Investors Protect Themselves from Pump and Dump Schemes?
To protect themselves from pump-and-dump schemes, investors should take the following steps.
- First, you should research the fundamentals of the stock.
- Avoid Penny stocks.
- Avoid stocks that have low volume.
- Avoid Telegram/SMS messages about stock market tips.
Conclusion
Pump and dump schemes are a type of financial fraud. They involve artificially inflating the price of a stock, often through false or misleading news stories, in order to “pump” the price. The perpetrators then “dump” the shares at a much higher price than they bought them for, pocketing their profits. Investors can protect themselves from these schemes by researching the fundamentals of the stock, avoiding penny stocks and low-volume stocks, and avoiding telegram/SMS messages about stock market tips. Protect Yourself from Pump and Dump Schemes: How to Spot and Avoid Financial Fraud.
