5 tips to recognise ‘pump and dump’ schemes

Highlights

  • A ‘pump and dump’ scheme is a way fraudsters use to manipulate stock markets to artificially inflate the price of a stock and generate illegal profits.
  • Unscrupulous investors use the scheme to create a market frenzy that will inflate a stock's price, only to dump the shares later by selling them at a higher price.
  • As a result, unsuspecting investors are left with a loss as their asset price falls. 

A ‘pump and dump’ scheme is a way fraudsters use to manipulate stock markets to artificially inflate the price of a stock and generate illegal profits. Unscrupulous investors use the scheme to create a market frenzy that will inflate a stock’s share price, only to dump the shares later by selling them at a higher price.

As a result, unsuspecting investors are left with a loss as their asset price falls, often ending up worthless. Other than penny stocks, fraudsters are now using these schemes in case of cryptocurrencies as well.

But you don’t worry. Here we discuss five tips to recognise ‘pump and dump’ schemes:

Unsolicited emails spam your inbox

Scammers start a ‘pump and dump’ scheme by sending emails to propagate their agenda. They send emails to millions of investors, explaining the potential of the targeted security. Their agenda gets fructified even if a fraction of the total mails sent to the targeted investors find a response. Even 1,000 recipients buying the given security can boost their purpose. Thus, you should never entertain such emails, which say that a given stock or cryptocurrency is a “can’t-miss opportunity.”

Advice from unlicensed advisors

You should always beware of unregistered or unlicensed advisors recommending investing in particular securities. These people are mostly interested in making money at your expense via ‘pump and dump’ schemes. It is always advised to conduct your research on a particular security before investing in it.

Share price zooms

Unsuspecting investors generally fall for such schemes when the price of a security is already surging. Who would not be interested in securities whose prices are rising as people trade to make profits? However, when a zooming price coincides with a ‘pump and dump’ email, it pays to be suspicious. It might mean that such a scheme is actually working for some fraudsters.  As investors get drawn into the scheme, demand pips supply, and prices jump. Thus, it is important to pay attention to the fact what is actually driving the prices.

Surge in volume

The volume also rises with a rise in security prices. Thinly traded stocks and cryptocurrencies are generally the kinds of securities targeted by scammers. It is so because it only requires a small increase in volume to push prices higher. When a stock that generally trades a few thousand shares each day suddenly surges to a few million, price moves can be significant.

Unscrupulous investors use the scheme to create a market frenzy that will inflate a stock's price.

Source: © Littlemacproductions  | Megapixl.com

Message boards

A group of message board participants advise others to make investments in stocks with certain characteristics. They generally advise to focus on stocks with low prices and high short interest. The share price surges sharply as the shorts are forced to cover.

Bottom Line

Investors must always beware of ‘pump and dump’ schemes. In case, you find a particular advice good enough, always conduct your own detailed research and only then proceed.

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