What Is a Pump and Dump Scheme?
A pump and dump scheme is a scam that includes the promotion of mediocre stock by investors, which creates a buying craze that booms or "pumps" up the stock price and reduces or "dumps" the stock's stock shares.
When the scam takes off, fraudsters use social media, investment research websites, email, advertisements, and investment newsletters to spread false or misleading information about a company's stock price.
The Securities and Exchange Commission (SEC) sites pump and dump illegal and pursue the offenders via regulatory proceedings.
How Does a Pump and Dump Scheme Work?
The urge to make profits from trading with stocks and crypto fuels the pump and dump scheme. By representing standard stocks as highly valuable, this scheme entices unaware investors. The entire process ignites at this stage.
The promotion continues with false reports and misleading statements circulating to different investors or potential investors. Fraudsters dupe clueless buyers into thinking the price of the stock will increase in the future. This leads to craze buy
ing, which boosts the stock price. This inflation of sales allows the scammers to gain hefty profits, hence the phrase pump and dump.
Once they have siphoned enormous profits, the fraudsters instigate the dramatic plummet of the prices by selling their shares. New investors end up losing much money.
With the entry of digital coins and blockchain technology, fraudsters have found different ways to scam people of their money through the crypto pump and dump. It works the same way as the typical pump and dumps, and scammers prefer the new coins that only need a little money to alter and initial coin offerings (ICOs). This is because, physiologically, most investors are ready to input their cash.
The SEC states that microcap stocks traded over the counter are likely to go through manipulation since information about them is readily available. The pump and dump scheme is an illegal offense and punishable by law.
In the investment world, if something seems too good to be true, then it probably is. Be very suspicious about why someone you don't know offers much information about a stock tip that forecasts a big and instantaneous investment return, which almost always is unlikely to happen.
As with any investment, it's essential that you research in places like pump and dumps Reddit and double-check everything before making any investment moves. This should protect you from pump and dump scams.