pump and dump
A form of securities fraud where promoters artificially inflate a stock's price through misleading positive statements, then sell their shares once the price is inflated.
Example
“The penny stock pump and dump scheme saw promoters buy shares at $0.10, tout them to unsuspecting investors, then sell at $2.00.”
Memory Tip
PUMP AND DUMP = hype the stock, sell at the top. Illegal, common with penny stocks.
Why It Matters
Understanding pump and dump schemes is crucial for protecting your investment portfolio from fraud. Retail investors who fall victim to these schemes can lose significant portions of their savings, making it essential to recognize warning signs and avoid securities promoted through suspicious channels.
Common Misconception
Many people believe pump and dump schemes only affect penny stocks or small companies, but these frauds can target stocks of any size. The schemes simply require enough investor interest to artificially drive up prices, regardless of the company's actual market capitalization.
In Practice
A group of promoters buys 100,000 shares of a small tech company at $2 per share for $200,000. They then flood social media with exaggerated claims about upcoming products, driving retail investors to buy shares. The stock price rises to $8 per share, and the promoters sell all their shares for $800,000 in profit. Once they stop promoting and sell, the stock price crashes back to $2, leaving retail buyers with massive losses.
Etymology
PUMP (inflate the price) AND DUMP (sell at the inflated price). PUMP it up, then DUMP your shares.
Common Misspellings
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See Also
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