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Highlights
Investors should always be wary of pump-and-dump schemes
These schemes work in such a way that they create a buzz around a stock
Once the share price gains, perpetrators of such schemes sell their positions and exit
Have you ever come across a scheme which seeks to manipulate stock prices through misleading recommendations? These schemes work in such a way that they create a buzz around a stock, which provides upward support to its share price. Once the share price reaches a certain level, perpetrators of such schemes, who already hold an established position in the stock of the company, sell their positions and exit. Such schemes are known as ‘pump-and-dump’ schemes, which promote fake and misleading information abound a stock for some vested interests.
These pump-and-dump schemes are employed by fraudsters to artificially boost the price of a stock and book illegal profits by selling these stocks at higher prices later. Eventually, unsuspecting investors book losses as the asset price falls. These fraudulent practices are considered illegal. The offenders are asked to pay heavy fines.
On this note, let’s discuss how investors can recognise ‘pump-and-dump’ schemes and take appropriate actions.
Earlier, pump-and-dump schemes were operated by fraudsters via cold calling. However, with the advancement in technology and the internet, the entire activity has shifted online, with crooks sending hundreds of mails to several unsuspecting recipients, enticing them to buy a stock.
Fraudsters use these schemes generally to counter micro- and small-cap stocks on less-regulated over-the-counter exchanges. These stock categories are generally easier to manipulate than others since these have low trading volumes, small flat and investor information. It requires little effort from fraudsters to target newbies into buying such stocks and artificially boosting stock prices.
Emails propagating agenda
It is not uncommon to see your email inbox getting spammed with messages propagating a particular agenda around a stock. These messages entice investors with huge returns in a short span of time. Even if a small section of investors gets enticed by such mails, the potential agenda of the spammers get fructified. Just imagine that even if 1,000 such recipients get sucked into the offer, the stock price will get a significant boost. The emails which say that a given stock or cryptocurrency is a “can’t-miss opportunity” should always be looked at with suspicion.
Unsolicited advice
Then, there are instances where unlicensed advisors are seen sharing recommendations for investing in specific securities. You should know that such advisors are not your well-wishers and they are only interested in making a quick moolah at your cost.
Once the selling volume of the targeted stock reaches a critical mass with no more buying in sight, these fraudsters dump the shares, making a big profit. But it leads to the stock price dipping sharply, even reaching below its original price, leading to big losses for the customers who are unable to sell their holdings on time.
The devil is in the details
You should always look out for obvious red flags. Before falling for the email, always ask yourself – Is the supposed investment sounding too good to be true? Investors get most confused when such ‘pump-and-dump emails coincide with zooming prices. These are the most common tactics used by stock touts. As investors get drawn into the scheme, demand pips supply, and the prices jump.
Cryptocurrencies are soft targets
Cryptocurrencies and small stocks are among the kinds of securities which are commonly targeted by fraudsters through pump-and-dump schemes. The reason is that only a marginal increase in volume is required to boost prices in their case.
Source: © Littlemacproductions | Megapixl.com
When a stock that generally trades a few thousand shares each day suddenly surges to a few million, price moves can be significant.
Message boards
Common sense can save you from misery
People falling for pump-and-dump schemes are the ones who ignore fundamentals of a company for quick returns. They are sucked into investing their hard-earned money in companies with weak fundamentals and an uncertain future. Several such firms are yet to become profitable. So, investors should be wary of making investments in such companies.
The other important thing to remember is that share prices can rise and fall with a change in sentiment.
Be cautious of FOMO
Fraudsters are generally good at creating panic among new investors. They constantly warn them about missing out on great returns
Bottom Line
Experts always advise investors, especially new investors, to beware of ‘pump-and-dump’ schemes. It is not an arduous task to procure the required information online about legitimate companies. In case there you are unable to find information about a stock, consider it a red flag.
Investors should always keep in mind -- "If it's too good to be true, it probably is." In case you come across a stop market tip, then take a pause and reflect on why is the person is so willing to share such a tip with you. Those who think about gaining large returns via a large investment often end up with burnt fingers. This is why experts focus on conducting thorough research as it is the only way to avoid being cheated by such pump-and-dump scams.
