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What is Pump and Dump?
Pump and dump is a form of securities fraud where false or misleading information is used to artificially inflate the price of an asset, after which insiders sell their holdings at the elevated price.
Definition
Pump and dump is an illegal market manipulation scheme involving the promotion of an asset to drive up its price, followed by a rapid sell-off for profit.
Key Takeaways
- Relies on misinformation or exaggerated claims.
- Commonly targets thinly traded or speculative assets.
- Illegal in regulated financial markets.
Understanding Pump and Dump
Pump and dump schemes typically involve coordinated promotion through social media, online forums, newsletters, or messaging apps. Promoters create hype to attract unsuspecting investors, increasing demand and driving up prices.
Once prices rise, the promoters sell their holdings (“dump”), causing the price to collapse and leaving other investors with losses. These schemes are most effective in markets with low liquidity, limited disclosure, or inexperienced investors.
Regulators actively monitor markets for pump and dump behavior, especially in penny stocks and emerging digital asset markets.
Real-World Example
Historically, penny stock markets have been frequent targets of pump and dump schemes, where promoters use email campaigns or online forums to spread false claims about imminent breakthroughs or acquisitions.
Importance in Business or Economics
Pump and dump schemes undermine market integrity, investor confidence, and fair price discovery. Preventing such manipulation is a core objective of securities regulation and enforcement.
Types or Variations
Classic Pump and Dump: False news or rumors drive short-term price spikes.
Social Media Pump and Dump: Coordinated promotion via online communities.
Crypto Pump and Dump: Targets low-liquidity digital tokens.
Related Terms
- Market Manipulation
- Insider Trading
- Securities Fraud
Sources and Further Reading
- Investopedia — Pump and Dump
- U.S. Securities and Exchange Commission (SEC) — Pump-and-Dump Schemes
- FINRA — Investment Fraud
Quick Reference
- Artificially inflates prices.
- Ends with rapid sell-off.
- Illegal and harmful to investors.
Frequently Asked Questions (FAQs)
Is pump and dump illegal?
Yes. It is illegal in most jurisdictions and subject to severe penalties.
How can investors avoid pump and dump schemes?
By verifying information, avoiding hype-driven investments, and researching fundamentals.
Are pump and dump schemes common today?
They still occur, especially in lightly regulated or speculative markets.
