Glossary > Pump and dump scheme
A pump and dump scheme is an illegal technique that artificially increases the price of an asset. In pump and dump, fraudsters often publish false or misleading information to create a buying frenzy that will raise the price of a stock. Then, dump its stock by selling its shares at an inflated price. When fraudsters dump their shares and stop scamming them, stock prices are often lower, and investors lose money.
The first step for fraudsters (the pump) is to buy large quantities of the asset. This will lead others to buy as well thinking that they would miss an opportunity by not doing so. The second step (the dump) takes place when the fraudsters sell all their assets making important profits in the process. At this point, the price of the asset plummets and leaves other investors with low-valued assets.
The misleading information about the company’s stock price may be on social media, investment research websites, newsletters, online advertisements, e-mail, internet chat rooms, direct mail, newspapers, magazines and radio. Microcap companies are particularly vulnerable to pumping and data transfer schemes. It is because there is often limit publicly available information about Microcap companies.
This Pump and dump scheme is used for cryptocurrencies as well. Fraudsters often use Telegram or Discord channels to promote an asset or an ICO and carry out their scheme for example.
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