Pump and Dump

A pump and dump is a type of securities fraud involving artificially inflating the price of an owned stock through false, misleading, or exaggerated statements (the "pump"), then selling the shares at the inflated price (the "dump"), leaving other investors with losses when the price collapses. The scheme typically works like this: Fraudsters accumulate shares of a low-priced, thinly-traded stock. They then promote the stock through newsletters, social media, spam emails, or online forums, making false claims about imminent news, breakthrough products, or hidden value. As unsuspecting investors buy in, the price rises. Once the price peaks, the fraudsters sell their holdings at a profit. Without their promotional support, the stock crashes, and later investors suffer losses. Pump and dump schemes particularly target penny stocks because their low prices and thin trading volumes make them easier to manipulate. Legitimate-seeming press releases, fake social media accounts, and paid promoters can create an illusion of genuine investor interest. The schemes often target unsophisticated investors who are attracted to the promise of quick gains. These schemes are illegal. The SEC actively pursues pump and dump cases, and perpetrators can face criminal charges, civil penalties, and prison time. However, new schemes constantly emerge, particularly in the age of social media and cryptocurrency, where regulation is still evolving. Warning signs of a pump and dump include unsolicited investment tips, claims of imminent explosive news, extreme promotional language, and heavy promotion of stocks with little trading history or public information. If something sounds too good to be true, it probably is. Protecting yourself means being skeptical of tips from unknown sources, researching any stock before buying, understanding why a stock might be rising, and being particularly cautious with penny stocks and other investments lacking extensive public information and regulatory scrutiny.