Pump and Dump Schemes

Don’t fall for a con artists stock market hype or you could get caught in a pump and dump scheme and lose your shirt.

The terms “pump and dump” refer to the tactics used to falsely hype up a company’s performance so that their stock will be purchased, the price driven up and at its peak, a sell off by those perpetrating the hype. Usually conducted by a company insider, a campaign is waged on message boards, forums or through email to “pump” up a company’s performance or predicted performance. It’s most often a company you haven’t heard of, yet because of these false claims a lot of interest is generated.

Image of pump and dump scheme

Pump first, dump second

Once the stock rises, based on the misleading information being disseminated, those perpetrating the stock “pump” sell off their shares. That’s the “dump” part of this scheme. They make a lot of money as they try to time the selling of their stock with the height of interest in the company. Those who purchased shares near the end of this sell off suffer the largest losses as the price falls soon after due to the large sell offs by the con artists responsible for the false publicity.

High tech start ups were all the rage in the late 1990s. This created a perfect environment for pump and dump schemes to flourish. Just because there were a few companies that made it big, this made it more acceptable to purchase stock from new companies that no one really knew much about.

Pump and dump ploys aren’t limited to the internet. Telemarketers will use the same strategy against you. They call and make claims about having insider information or an infallible stock picking formula that you cannot afford to ignore. These calls may in fact be coming from someone on the inside because they are the ones who benefit most from promoting false, misleading information about the company they work for.

How to protect yourself

Don’t purchase stock based on tips, especially ones from the internet or unsolicited calls. Do your homework. Nothing can protect you better than due diligence and information from well known and respected sources.

Related SEC Pump and Dump Scheme Links



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