Pump And Dump

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DEFINITION of 'Pump And Dump'

A scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company's stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.

The victims of this scheme will often lose a considerable amount of their investment as the stock often falls back down after the process is complete.

INVESTOPEDIA EXPLAINS 'Pump And Dump'

Traditionally, this type of scheme was done through cold calling, but with the advent of the internet this illegal practice has become even more prevalent. Pump and dump 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.

Claims about how a stock is set to break out should be met with a considerable amount of caution. It is important to always do your own research in a stock before making an investment.

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