Pump it in trading. Indicators and Strategies

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The Bottom Line A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once the stock price has risen following the surge in interest as a result of the endorsement. Here, we take a closer look at how pump-and-dump schemes work and how to avoid them.

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Key Takeaways Pump-and-dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The favored medium of communication for traders involved in pump-and-dump are social media platforms or anonymized messaging apps like Telegram and Discord.

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Promoters of the scheme will then begin to coordinate rumors, misinformation, or hype in order to artificially increase interest in the security, driving up its price. Then, once the price of the stock has been increased sufficiently by unsuspecting marks, the promoters then sell the stock at high prices.

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But with the advent of the internet, this illegal practice has become even more pump it in trading. Fraudsters post messages online enticing investors to buy a stock quickly, with claims to have inside information that a development will lead to an upswing in the share's price.

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Once buyers jump in, the perpetrators sell their shares, causing the price to drop dramatically. New investors then lose their money.

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  • Pump-and-dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements.

These schemes usually target micro- and small-cap stocks, as they are the easiest to manipulate. Due to the small float of these types of stocks, it does not take a lot of new buyers to push a stock higher.

How Does a Pump and Dump Scam Work?

The stock is usually promoted as a "hot tip" or "the next big thing" with details of an upcoming news announcement that will "send the stock through the roof. Pump and dump scams tend to only work on small and micro-cap stocks that are traded over the counter.

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These companies tend to be highly illiquid and can have sharp price movements when volume increases. The group behind the scam increases the demand and trading volume in the stock and this new inflow of investors leads to a sharp rise in its price. Once the price rise has formulated, the group will sell their position to make a large short-term gain.

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An Example of a Pump and Dump During the summer months of the stock below, a pump and dump scheme was initiated by using a "wrong number" scam. A message was left on victims answering machines that talked of a hot stock tip pump it in trading was constructed so that the victim would think that the message was an accident.

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This drastic increase was seen along with an equally large increase in volume. The stock had seen an average daily trading volume before the price increase of less thanbut during the scam the stock traded up to nearly one million shares on a number of trading days.

Scenarios[ edit ] Pump and dump schemes may take place on the Internet using an e-mail spam campaign, through media channels via a fake press release, or through telemarketing from " boiler room " brokerage houses such as that dramatized in the film Boiler Room. Promoters may also post messages in online chat groups or internet forumsurging readers to buy the stock quickly. The increased demand, price, and trading volume of the stock may convince more people to believe the hype, and to buy shares as well. When the promoters behind the scheme sell dump their shares and stop promoting the stock, the price plummets, and other investors are left holding a stock that is worth significantly less than they paid for it. Fraudsters frequently use this ploy with small, thinly traded companies—known as " penny stocks ," generally traded over-the-counter in the United States, this would mean markets such as the OTC Bulletin Board or the Pink Sheetsrather than markets such as the New York Stock Exchange NYSE or NASDAQ —because it is easier to manipulate a stock when there is little or no independent information available about the company.

Pump-and-dump schemes usually target micro- and small-cap stocks or new asset classes like cryptocurrencies which are relatively illiquid and therefore more easily manipulated.

The Bottom Line Always keep this investment caveat in mind: "If it's too good to be true, it probably is.

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Do not think you can make a large and quick investment return because it's unlikely to happen. It's also vital that you do your own research about any investment.

This should help you avoid being duped by such pump and dump scams. Compare Accounts.