Loading the player...

What is 'Pump And Dump'

Pump and dump is 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.

BREAKING DOWN 'Pump And Dump'

Pump and dump schemes were traditionally done through cold calling. With the advent of the internet, this illegal practice has become even more prevalent. These 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.

Boiler Room Tactics

The pump and dump scheme formed the central theme of two popular movies, "Boiler Room" and "The Wolf of Wall Street," both of which featured a warehouse full of telemarketing stockbrokers pitching penny stocks. In each case, the brokerage firm was a market maker and held a large volume of stock in companies with highly questionable prospects. The firms' leaders incentivized their brokers with high commissions and bonuses for placing the stock in as many customer accounts as possible. In doing so, the brokers were pumping up the price through huge volume selling. Once the selling volume reached critical mass with no more buyers, the firm dumped its shares for a huge profit. This drove the stock price down, often below the original selling price, resulting in big losses for the customers because they could not sell their shares in time.

Pump and Dump 2.0

The same scheme can be perpetrated by anyone with access to an online trading account and the ability to convince other investors to buy a stock that is supposedly ready to take off. The schemer can get the action going by buying heavily into a stock that trades on low volume, which usually pumps up the price. The price action induces other investors to buy heavily, pumping the share price even higher. At any point when the schemer feels the buying pressure is ready to fall off, he can dump his shares for a big profit.

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

RELATED TERMS
  1. Portfolio Pumping

    Portfolio pumping is the illegal act of bidding up the value ...
  2. Predatory Dumping

    Predatory dumping is anti-competitive behavior where foreign ...
  3. High Close

    A high close is a tactic used by stock manipulators making small ...
  4. Boiler Room

    An operation that features high-pressure salespeople peddling ...
  5. Manipulation

    Manipulation is the act of artificially inflating or deflating ...
  6. Ponzimonium

    Ponzimonium is an outbreak of Ponzi schemes that take authorities ...
Related Articles
  1. Investing

    Who Actually Trades or Invests in Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily.
  2. Managing Wealth

    6 Ways to Avoid an Investment Ponzi Scheme

    Investments that promise high returns with little risk are everyone's dream – but if they could also be a Ponzi scheme. Here's how to protect yourself.
  3. Insights

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
  4. Insights

    Pump Primer: Trump's Pump Blunder Explained

    Trump raises a lot of questions about his tax reform (and know-how) with a reference to Keynes. Isn't this supposed to be a supply-side thing?
  5. Investing

    How to Invest in Penny Stocks (ADAT, ANAD)

    Is the lure of finding a diamond in the rough too strong to ignore? Then here's a guide to investing in penny stocks.
  6. Financial Advisor

    Is It the Right Time to Buy a Home in London?

    The "Help to Buy" scheme has been sweetened further for first time home buyers in London. Should you jump to buy a home in London now?
  7. Small Business

    Multi-Level Marketing

    Learn how to differentiate between a legitimate marketing strategy and a pyramid scheme.
  8. Financial Advisor

    Gasoline Prices Could Rise on Record Demand

    According to a Reuters analysis of U.S. Energy Information Administration (EIA) data, U.S. gasoline consumption is on track to hit record levels in 2016.
  9. Small Business

    Five Investing Pitfalls To Avoid, According to Investor's Business Daily

    Common sense or common folly? Discover some approaches to circumventing typical stumbling blocks on the road to profitable investing.
RELATED FAQS
  1. How does a pump and dump scam work?

    A pump and dump scam is the illegal act of an investor or group of investors promoting a stock they hold and selling once ... Read Answer >>
  2. What is the difference between a Ponzi and a pyramid scheme?

    Pyramid schemes and Ponzi schemes share many similar characteristics in which unsuspecting individuals are fooled by unscrupulous ... Read Answer >>
  3. What is a boiler room operation?

    A 'boiler room operation' uses high-pressure sales tactics to cold-call clients and then push them to buy risky, intransparent ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center