Criminals worldwide are actively looking for measures to target people’s money and personal information. In this regard, the “pump and dump” scam is one of the most popular Internet frauds that keeps victimizing unsuspecting people and businesses.
This article will go over everything about the Pump and Dump scam scheme.
What is a Pump and Dump Scam Scheme?
Pump and dump schemes broadcast false or misleading information to incite a purchasing frenzy that will “pump” up the stock’s price and then “dump” their shares at the inflated price.
The process begins when some ordinary stockholders engage in misleading advertising. Fake news, fraudulent stories, and misleading claims are all used to promote the company as the next great thing.
You can disseminate misleading or false information regarding a company’s stock price through a variety of channels, such as email, newspapers, social media, websites that specialize in investment research, investment newsletters, online advertisements, magazines, and radio.
Then, unsuspecting investors put their money into the company, believing that its stock will rise in the future — the stock price rises due to frenzied buying. Then, the scheme’s creators begin selling or dumping their shares to reap significant gains.
When the pumping and dumping subside, the stock price falls rapidly. As a direct consequence of this, many investors will face significant losses. Since the market artificially boosted the stock’s value without real growth, the price rarely rises again.
As a result of the limited access to information about a company, con artists often apply this strategy to less publicly traded companies that are on the smaller side.
Types of Pump and Dump Scam Schemes
Fraudsters may use various types of pump and dump schemes. Here are three of the most commonly used schemes:
- Classic Pump and Dump Scheme
Scammers can manipulate information about a company and its shares in a traditional pump and dump scheme. Stock pitches over the phone, bogus news releases, and the provision of “inside” information that can enhance the stock price are all possibilities of this method.
Furthermore, they might employ dishonest stock promoters’ services to draw investors’ attention to the stocks.
- Boiler Room
Boiler rooms are small brokerage firms with with a staff of brokers that operate underhandedly to peddle dubious investments. As a market maker, the company employs cold calling to sell penny stocks that the brokers buy or sell.
To raise the stock’s price, the brokers in the boiler rooms aim to sell as many shares as possible. When the stock price rises, the company can recoup its investment by reselling its shares.
- “Wrong Number” Scheme
A newer pump and dump approach is the “wrong number” method. Some people can receive voicemails from strangers who have a “hot” investment tip for a friend to share. The con artists want you to think that the voicemail was left on your phone accidentally. But, it is a planned move to get potential investors interested in a certain stock and increase the demand for that stock.
Ways to Identify a Pump and Dump Scam
The following is some information that will assist you in recognizing a pump and dump scam, which will allow you to better protect yourself and your financial portfolio.
Receiving an Unsolicited Email
If you receive an unsolicited email promoting a stock or cryptocurrency while checking your email, you may be the next prospective victim of a pump and dump operation.
The objective of pump and dump fraudsters is to attract as many investors as possible to their targeted securities. Sending millions of unwanted emails to potential targets is one of the easiest ways to achieve this.
The Skyrocketing of a Security Price
One of the simplest methods to entice unsuspecting victim investors to purchase a security is while its price is soaring. After all, investors purchase stocks and cryptocurrencies to make money, so when a security’s price increases by leaps and bounds, it is difficult not to be intrigued.
But it pays to be wary when a price spike coincides with a pump and dump email or message board effort.
Unregistered or Unlicensed Information Source
Legitimate, regulated, and fiduciary financial advisors are obligated by law to make investment recommendations in your best interests. On the other hand, unregistered, anonymous touts or “advisors” owe you no legal responsibilities. Most of the time, they care about putting money in their own pockets.
Take any unsolicited advice or information from someone not registered or licensed with a grain of salt. Touts are simply marketers who make money by enticing you to put money into investments that will benefit them rather than you.
Real-World Examples of Pump and Dump Schemes
There are many examples of pump and dump schemes in the financial press. Most likely, beginner investors, who lack extensive stock market experience, succumb to the scam because they fear missing out on a once-in-a-lifetime chance.
It was common for scammers to use spam phone calls and brochures to entice victims. Using email, social media, and chat rooms, fraudsters with access to internet trade began spreading disinformation online over time.
During the first weeks of the year, in January 2021, GameStop’s share price went from $20 to $483, thanks to private investors. Shares of GameStop plummeted over 90% in February to $53.50. In the wake of the recent purchasing frenzy, federal authorities reportedly considered whether they manipulated stock prices.
Also, in 2021, prosecutors said that John McAfee, the founder of the well-known anti-virus company, made millions by manipulating the prices of some cryptocurrencies on the market.
In the 1990s, when boiler room scams were at their peak, pump and dumps were much more common. But they are still alive and, unfortunately, doing well in victimizing people today. Most of the time, they are built around the latest trend to gain immediate attention.
So, you should be wary of any new OTC stocks that claim to be growing in the new favorite industry on the stock market. For extra safety, you might want to use an AI-powered market analysis tool for investors and traders to optimize and protect your investments.