What is a “Pump and Dump” Scheme?

A pump and dump scheme is a form of stock fraud in which the perpetrators seek to artificially inflate the price of a stock in which they already have a position in order to profit. Typically, the stocks used in a pump and dump scheme are microcap or penny stock companies as the prices of these stocks are easy to manipulate. Once the hype has increased share value, the perpetrators sell their positions for profit, often leaving the victims of the scheme with significant financial losses.

Much of the hype in a pump and dump scheme occurs on the Internet in the form of messages that urge readers to buy a stock quickly before its price gets too high. Telemarketers (often company insiders) might also be involved making claims that the stock is a “can’t miss” opportunity. Pump and dump is an illegal practice and can lead to significant penalties for the people responsible.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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