Pump and Dump Scheme: Target Small-cap Stocks
Pump-and-dump is a type of stock fraud. It is an act of encouraging investors to buy shares of a
particular company so that the price of its shares will increase automatically. It is a process of
boosting the price of stock via recommendations based on false & fabricated and misleading
information.
The traders who are involved in the pump-and-dump strategy use social media platforms or
messaging apps to spread rumors, misinformation, or create hype around a particular stock so
that it will capture stock market sentiment and the stock price will increase. Once the stock
price reaches a considerable height, the promoters will sell the stock to get a substantial return.
How is Pump-and-Dump done?
Earlier Pump-and –Dump was done through cold calling. With the advent of new technologies
and the Internet, it has become more accessible and easy.
•Pump – Stock manipulators or fraudsters put messages online so that it will encourage
the investors to buy a particular stock claiming that they have access to confidential
information.
•Dump– Once the price of the stock goes up, the manipulators start selling the shares at a
high price with a substantial return. There may be a loss to new investors as the price of
the stocks falls due to selling pressure.
Which are the stocks most vulnerable to Pump-and- Dump?
Pump–and–Dump strategy mostly targets small-cap stocks as they can be easily manipulated.
Small-cap shares are sold in very few numbers in the market and there are very few takers for
these shares. Just a few new buyers are needed to push up the prices of these stocks. This new
inflow of buyers for these stocks will raise the price rapidly. As the share price goes up, the
traders tend to sell their shares to get considerable short-term returns. The details of this
Pump-and-Dump scam are different but the strategy has a basic principle – change the supply
and demand of the stock.
Online Pump and Dump
Pump and Dump scheme can be activated by anyone who has an online trading account. As per
the strategy, the trader buys heavily of the stocks with a low trading volume. This activity will
pump up the price of the share. This pump in price will lure other investors to that stock which
would push up the price of the share further. At this point, the trader will start selling the
shares with a significant margin.
Types of Pump and Dump Scheme
The different types of pump and dump schemes used by the fraudsters include –
•Classic Pump and Dump Scheme- This scheme involves manipulating the information
about a company and its stock through mobile, fake news dissemination, or the spread
of some inside information that will push the stock price up.
•Boiler Room- A small brokerage firm employs multiple brokers who perform dishonest
sales practices to sell investments to investors. Brokers sell stocks by calling at random
or by cold calling. They sell as many shares as possible to push the price up. When the
stock price rises, the brokerage firm sells its shares for a large profit.
•Wrong number scheme- You can receive voice messages with a privileged investment.
Scammers try to make it look like a voicemail message was accidentally sent to you. It is
a targeted act to draw the attention of potential investors to a particular security and
stimulate demand for that security.
Pump and dump systems are more likely to succeed in the crypto environment. Indeed, these
tools lack regulation, many of which have low trading volume, and low liquidity, and are too
complex for the average user to understand.