Pump and dump is a popular name for a scheme that tries to inflate the market price of a particular stock through promotions based on misleading, baseless, or highly exaggerated claims. The people who participate in this scheme are typically those who already have an established position in that targeted stock. They sell or “dump” their positions as soon as the artificial hype has led to a rise in the stock’s price.
Pump and dump is an unlawful activity under the securities law, and may result in severe penalties for the perpetrators. The victims of this nefarious agenda are usually small investors who will lose a significant amount of their investment as the stock price typically falls sharply after the perpetrators have their dumped their stock in the market.
Micro Cap Stocks Targeted
Micro cap stocks, commonly known as penny stocks, are the easiest targets for pump and dump schemes. These stocks are more prone to manipulation because they usually have a small float, and it does not require a large number of new buyers to create an artificial demand for these stocks.
Furthermore, much public information about microcap stocks is not available easily. Therefore, it becomes easier to spread rumors or false statements pertaining to such stocks. Therefore, it is particularly important to research microcap and small cap stocks properly before making investments in them.
Tools Used for Pump and Dump
Telemarketing and online communication are two of the primary tools used to carry out pump and dump schemes. To make this scheme successful, it is necessary to reach out to maximum number of potential stock investors. With the widespread popularity of the Internet, it has become quite easy for pumpers and dumpers to reach out to potential investors at a very affordable cost.
On the Internet forums and websites dealing with microcap stocks, it is common to find messages that prompt readers to purchase a stock quickly because the price is expected to shoot up. Sometimes telemarketers are used to reach out to targeted investors with a similar sales pitch. Such promoters typically claim to have “inside” information about the targeted stock, which can lure gullible investors to buy that stock and “pump up” its price until the fraudsters “dump” their positions.
Common Pump and Dump Scenarios
Aggressive Online Promotion
In addition to the classic pump and dump scenario where the promoters claim to have “inside” information and spread that story all over the Internet, there are a number of other approaches used to carry out this iniquitous plan successfully. E-mail spam campaigns, biased newsletter recommendations, chat room promotion, and aggressive sales campaigns from “boiler room” brokerages are also used to push up the demand for a targeted stock, and create an artificial hype.
Hack, Pump, and Dump
Hack, pump and dump is a more innovative form of the classic pump and dump practice. In this case, an individual or a group of people who perpetrate the scheme, purchase a substantial quantity of the targeted stock. They may even make use of compromised brokerage accounts to buy big quantities of the stock. The end result is an artificial price hike that is usually spiked further with day traders getting lured by the stock due to its quickly advancing price. The perpetrators of the scheme then sell off their purchases at a premium.
One of the newest variants of the pump and dump scheme is the “misdialed call.” In this case, the manipulators of the idea arrange to make seemingly “misdialed calls” to potential stock investors, leaving a “hot” insider tip for a friend. The message is designed to appear as if the speaker inadvertently left it on the wrong voice mail or answering machine.