What is a Pump and Dump Scam?

A Pump and Dump is a misleading scheme that is composed of two parts. The first part is the pump, in which the stock price is inflated by misleading information among the new investors through social media etc.; and the second part is the dump when the share prices go up by the false information the big fat investors start selling the stock. 

For example, Suppose 'A' has a huge number of shares of a company but due to the internal performance of the company the share prices are at their low giving 'A' a huge loss. So, in this case, 'A' decides to contact some traders who trade in bulk and are very much active on social media. These traders will start doing some trading of these shares after a while they show these trading on their social media and spread some news that this stock is going to give a massive return etc. 

People by their nature wanted to become rich faster and start biding on this stock and the share price will move upward. At a point in time, the person with a high number of shares starts selling the share and the price of the company falls below. This pump and dump scheme usually happen with penny stock as these stock are not bothered by sensible investors. 

Pump and Dump Working

The Pump and Dump scam often targets the penny stock in which the internal information is not given much in the public domain the scammers took the advantage of this situation and spread positive fake news about that stock. This pump and dump scam correlates with the movie ‘the wolf of the street‘, where the scammer leaves the message to the public and the public sooner or later believe that God is trying to help them and they buy these stock. Today, scammers send millions of emails, text messages, youtube videos, Twitter, etc. 

That’s why it is always told not to invest in these stocks where the financial reports and many other parameters do provide in the public domain. Now, this pump and dump scam not only runs in the stock market but is equally done in the crypto market. Crypto has no regulation so scammers have no fear they just play their pump dump scam. In crypto, there is something also to be known called ‘short and distort’ where the scammer first sells the stock for a while by spreading some negative news and people in panic also start selling their stock. Now when the stock price goes below they start buying the stock and there is a huge increase in the stock price resulting in making a high profit.

Government Actions

The pump and dump scam is not new it has been practiced for a decade and the institution knows about this. Generally, Government institutions are tackling this in three steps. Firstly, the government is increasing surveillance on the financial results by having a separate team and also starting investing in the data warehouses using some pattern recognition algorithm to identify pump and dump schemes. Secondly, Government is also watching those messages which are shared as stock tips with the help of telecommunication authorities, as to create the software where some special keyword is tracked. Thirdly, to reduce the pump and dump strategy is the increase education among the investor. With the help of education, the new investors will automatically stop dropping money in the pump and dump scam. 

How to Identify Pump and Dump Scam?

Some points need to be remembered to identify these scams:

• Do not run after the messages you received on social media, always check the source of the messages or even just do your analysis.
• Do check the red flags of a particular stock as well as be alert if you heard some terms like the limited period offer, insider information, etc
• Some creators have some followers they also try to promote some shares and also you will find that they try to promote those shares in which information is not available in the public domain.
• The most important thing is that, do your research and analysis and if you do not have that much time then do hand over your money under the mutual funds where experts take care of your money.

Lastly, one can take to better identify pump and dump strategies is to learn more about them from newspapers online magazines newsletters, and blogs that often describe these new frauds with adequate elaboration.