Pump-and-Dump Scams: Dissecting the Scheme

When it comes to stock market scams, one that stands out is the pump-and-dump scam. These deceptive practices typically focus on penny stocks, which are small- and micro-cap stocks. If you’re considering investing in penny stocks, it’s crucial to familiarize yourself with this widespread scam and learn how to avoid becoming its next victim. In a pump-and-dump scheme, fraudsters manipulate stock prices by falsely inflating them (pumping). This is usually achieved through exaggerated or misleading information. Being alert and knowledgeable about these scams is essential for safeguarding your investments. Stay informed and protect your financial well-being.

What Is a Pump-and-Dump Scam?

A pump-and-dump scheme is a deceptive practice in which scammers artificially boost the prices of stocks or securities by spreading false or exaggerated information. By making investors believe that the assets hold more value than they actually do, these fraudsters aim to manipulate the market for their own gain. While such scams are often orchestrated by deceitful stock brokers and promoters, it’s important to note that anyone who has access to a trading account can potentially engage in a pump-and-dump stock scam. Stay cautious and be aware of this fraudulent trend in the financial world.

How Does a Pump-and-Dump Scheme Work?

Scammers employ aggressive sales tactics, like engaging in cold calls from boiler rooms, to coerce naive investors into purchasing substantial amounts of stocks with the intention of driving up their value. Additionally, they commonly disseminate deceptive information, such as issuing fabricated press releases, to persuade investors into acquiring shares in a particular company. Their goal is to manipulate unsuspecting individuals into making investment decisions based on false claims of success. In certain instances, the companies that pump-and-dump scammers promote are essentially empty shells without any legitimate business operations. Once the shares involved in one of these fraudulent schemes reach a specific threshold, the scammers promptly sell off all their assets, generating considerable profit. Consequently, the share prices experience an immediate descent, causing unsuspecting investors who were not privy to the scheme to incur losses on their trades.

How Is Pump-and-Dump Illegal?

The Securities Exchange Act of 1934 prohibits any fraud, material misstatements, or material omissions in connection with the purchase or sale of securities. Anyone found to be part of a pump-and-dump scheme is in violation of this act, and can also be found in violation of a number of other laws. Those charged and found guilty of these shady business practices face heavy fines and even jail time.

How To Avoid Pump-and-Dump Scams

Think Twice Before Investing Anywhere

Any investment is a risky commitment, so you should be 200% sure about where you put your money. Making impulsive investment decisions without doing your research or based on emotions or a fear of missing out is the best way to get scammed through a pump-and-dump scheme.

 

Remember that fraudulent stock promoters and brokers usually use high-pressure sales tactics to get you to buy penny stocks without thinking or taking the time to investigate them yourself. If you take the time to think twice before any investment, you’re much less likely to fall victim to an investment scam.

Assume Everything You Read Is False Online Unless Proven Otherwise

Since scammers release fake statements and post articles with false information online as part of their strategy to inflate stock prices, you have to be very careful about where you get your information.

 

Securities criminals have gotten very good at making their sites look professional and believable. So, just because something looks and sounds legit, doesn’t mean it is. 

 

To avoid pump-and-dump stock schemes, always get your investment advice from trusted online sources or reputable brokers.

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