Understanding How Pump-and-Dump Scams Operate in Today's Markets

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A pump-and-dump scam involves an individual or group illegally promoting a stock they own to artificially inflate its price through increased interest, then selling off their shares at a profit once the price surges. This article explores the inner workings of pump-and-dump schemes and offers guidance on how to recognize and avoid them.

Key Insights

• Pump-and-dump scams rely on spreading false, misleading, or exaggerated claims to boost stock prices artificially.
• Modern scammers often use social media platforms and anonymous messaging apps like Telegram and Discord to coordinate their efforts.
• They create hype, rumors, and misinformation to generate artificial demand, causing stock prices to spike.
• Once the price peaks due to unsuspecting investors buying in, scammers quickly sell their shares, leaving others with losses.

Fundamentals of Pump-and-Dump Schemes

Traditionally executed via cold calls, pump-and-dump scams have evolved with the internet, becoming more widespread and sophisticated. Fraudsters post enticing messages online claiming insider knowledge about upcoming developments that will boost stock prices. When new investors buy in, scammers offload their shares, triggering a sharp price decline and financial losses for those late to the game.

These scams typically focus on micro-cap and small-cap stocks because their limited supply makes it easier to manipulate prices with relatively few buyers.

Stocks are often hyped as "hot tips" or "the next big opportunity," accompanied by fabricated news announcements promising explosive growth. Although details vary, the core tactic involves artificially shifting supply and demand. Pump-and-dump schemes mainly target illiquid, over-the-counter stocks that experience volatile price swings with increased trading volume. The orchestrators boost demand and volume to drive prices up, then sell their holdings to secure quick profits.

A Real-World Pump-and-Dump Example

In one notable case during summer, scammers employed a "wrong number" voicemail tactic to lure victims with a seemingly accidental hot stock tip message. This deceptive approach sparked a rapid price surge from approximately $0.30 to nearly $1.00, a 200% increase within a week, accompanied by a spike in trading volume from under 250,000 to nearly one million shares daily.

Unfortunately, after the peak, the stock plummeted to around $0.20, causing an 80% loss for investors who bought near the top.

Important Considerations

Pump-and-dump scams primarily prey on micro- and small-cap stocks or emerging asset classes like cryptocurrencies, which are less liquid and thus more vulnerable to manipulation.

Final Thoughts

Remember the golden rule of investing: "If it sounds too good to be true, it probably is." Be cautious when receiving unsolicited stock tips, especially from unknown sources. Quick, large returns are rarely legitimate. Conduct thorough research before investing to safeguard yourself against falling victim to pump-and-dump schemes.

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