This fraudulent scheme’s phony recommendations might inflate a stock or security’s values. These recommendations rely on either wholly without merit or greatly exaggerated assertions. The pump-and-dump strategy’s backers will sell their shares after the company’s stock price has soared. There could be serious consequences for breaking the rules of securities legislation and doing this. The number of pump-and-dump operations has increased in tandem with the development of the bitcoin market. In this read, we will read more information about them. 

Working Of Pump and Dump Scheme

It is common practice to manipulate microcap stocks, often called penny stocks, as part of a strategy. Lower-cap companies own these equities. In most cases, microcap stocks may be traded over the counter (OTC) for little money, sometimes even cents. Not all requirements for public listing have been satisfied.

Scammers may change the information on the securities. They may also take advantage of the lack of public information more easily, as potential investors need more resources to confirm all the facts about a business.

Additionally, microcap stocks are very illiquid due to their low trading volume. Remembering this, even little transactions may significantly increase the value of the security. Some ways con artists use false news releases, unsolicited emails, and phone calls in pump and dump operations.

Real-Life Examples

The financial news is rife with pump-and-dump scenarios. Many people fall prey to this scam because they aren’t well-versed in stocks and are terrified they will lose out on a fantastic opportunity.

Employing spammy phone calls and fliers was formerly a favorite tactic of scammers. Over time, dishonest online dealers started distributing misinformation via various online mediums such as chat rooms, social media, and email. One popular strategy employed by scam artists is sending out spamming SMS.

The stock price of GameStop surged from $20 to $483 in only two weeks in January 2021, driven entirely by individual investors. Almost 90% of GameStop’s value, or $53.50, was wiped off in the February market crisis. Federal investigators are reportedly investigating the purchasing frenzy for signs of stock price manipulation, a suspicion they hold.

Also coming soon are cryptocurrency pump-and-dump strategies. In 2021, authorities claimed that John McAfee, creator of the renowned antivirus company, made millions by illegally manipulating the market price of certain cryptocurrencies. You can read more about all this in the book “Trading: Technical Analysis Masterclass” for a better understanding of pump and dump trading alongside other strategies.

Types of Pump And Dump Schemes

There are a variety of pump-and-dump strategies that vulnerability researchers could use. The following are the different Pump And Dump Schemes:

Classic Scheme

Classical techniques may take many forms, including manipulating business and stock information. For example, some people may artificially inflate the stock price by spreading “inside” information, making up press releases, or making up stock pitches. In addition, dishonest stock promoters might be engaged to attract investors.

Boiler Room

The brokers in a small brokerage known as a boiler room engage in dishonest sales tactics to offer clients questionable assets. Brokers use cold calling as part of their market-making duties to sell penny stocks that the business buys or sells. Boiler room brokers aim to increase stock prices by trading as many stocks as possible. As the stock price rises, the corporation can sell its shares at a profit.

Wrong Number Scheme

A novel pump-and-dump tactic is the “wrong number” method. Someone unknown may contact certain people’s phones and offer “hot” financial advice for their loved ones. Assuming the voicemail was an accidental overflow, the scam artists would have you believe otherwise. However, getting potential investors interested in a certain stock is the point.

How to Spot These Pump And Dump Scams

The Financial Industry Regulatory Authority (FINRA) holds that pump-and-dump strategies need not be widespread to generate profits. A former CEO and associates reportedly gained $78 million from Jammin’ Java. This coffee firm licensed Bob Marley’s image by dumping 45 million shares into the market, causing prices to plummet. Several considerations should be considered while attempting to ascertain the veracity of a promotion. You can also read through all this in the “How to Day Trade for a Living” audiobook by Andrew Aziz, which can help you through your trading journey.

Caution Of Unknown Sources

Never open attachments from unknown senders in an email or newsletter. Also, exercise caution when you get warnings or emails from companies suspiciously similar to ones you already know and trust. You may skip if things seem odd or badly constructed.

Notice The Frequency

Keep track of how often it becomes bothersome to get emails from unknown senders or those tagged as spam. Getting more than one in a short amount of time might be a warning indication. An overwhelming amount of marketing and telemarketing communications is likely flooding your inbox, urging you to buy or do something.

Check The Stock

Look at the stock’s historical data to see its price fluctuations. During a pump-and-dump, the stock price and trading volume are quite low. Traditional stock exchanges such as the NASDAQ and the NYSE seldom see such activity. It might be a red flag if the stock doesn’t trade on a national securities exchange.

Research SEC Files

Looking at the company’s SEC filings can be a smart move. Unlike on a regular stock exchange, companies that trade on an over-the-counter market are not required to disclose certain information. Warning signs should be triggered if any company reports are missing.

How To Invest In Cryptocurrencies Safely

Cryptocurrencies are no different from any other investment because they carry the inherent risk of loss. The Securities Investor Protection Corporation (SIPC) insurance does not cover cryptocurrency exchanges. This means that clients’ money and assets held at brokerage businesses that are members of SIPC are not protected.

Therefore, you should be prepared to lose all your money if the exchange goes bankrupt. For your protection, consider these guidelines along this audiobook named “The Everything Guide to Investing in Cryptocurrency”, available on Amazon for a better crypto investment journey  before putting your money into cryptocurrency:

Do Research

Read its documentation carefully before investing in a token, currency, or blockchain platform. Find out who the platform targets and what issue it hopes to resolve. Digital assets that show promise usually have a real-world goal and a plan to achieve it.

Always Start Small

Always maintain self-control while betting. Putting more than 5% of your wealth into Bitcoin can be a mistake. Cryptocurrencies are still in their early stages as an asset class. Because the extent to which the general public will adopt them is anyone’s estimate, they should be seen as speculative investments now. If you consider cryptocurrency an investment with a large loss potential, you could be more prepared to take precautions.

Trust Reputable Exchanges

You run the risk of not being able to get trustworthy tokens and coins if you use a less well-known cryptocurrency market. However, there’s no guarantee that the exchange will stay intact. Major cryptocurrency exchanges consider liquidity needs and other variables when deciding which currencies to add to their platforms. Listings may be checked on platforms like the American bitcoin exchange Coinbase. Nevertheless, SIPC insurance will not either.

The Bottom Line

Finally, there’s the pump-and-dump stock scheme, wherein the stock price is artificially raised through the use of misleading or false statements—the stock price plummets after the schemers unload their shares at a premium. Be careful and do your homework before putting your money into any stock.

Staying up-to-date on company news should be a top priority for any investor. Pay close attention to any unexplained changes in stock price and be wary of tips from suspicious sources. Always consult a financial advisor and trust reputable financial news sources. According to the golden rule, you shouldn’t put your money into something if it sounds too good to be true. Also, read good trading books; my personal favorite is available on Amazon, including “The Only Technical Analysis Book You Will Ever Need”, which will unravel all trading strategies along with pump-and-dump trading upfront for you.