A pump and dump scheme is when an individual or group of investors promotes a company they own and then sells after the stock price has risen due to the increased interest generated by the promotion. We look at how pump-and-dump tactics operate and how to prevent them in this article.
Cold dialing used to be the method of choice for pump-and-dump scams. However, with the internet’s invention, this illicit behavior has grown much more common. Fraudsters use social media to entice investors to acquire a company rapidly by claiming to have inside information about a change that will result in a price increase. When buyers come in, the criminals sell their shares, causing the price to plummet. The money of new investors is then lost.
Because micro- and small-cap stocks are the simplest to manipulate, these schemes generally target them. Because these companies have a limited float, it only takes a few new purchasers to propel a stock higher.