Q: What is a pump and dump?
The term “pump and dump” is used to describe a form of stock market manipulation in which the price of a stock is artificially pumped higher while the perpetrators of the pump sell to unsuspecting buyers.
I talked about penny stocks this morning. If you search online for “penny stocks”, you will see a veritable smorgasbord of websites that promote them. What these sites do is send you alerts about penny stocks that they believe will go up in value.
Here’s how the pump and dump actually works:
Stock promoters will send out alerts by email to thousands of people who have signed up to their newsletter. What they usually do is instruct you to “check your inbox on Monday morning at 9:40 a.m. for our hottest stock pick!”
If it works – and believe me, it often does – you, and a host of others, will buy shares in the stock being promoted, causing it to rise in value.
You will then receive another message in your inbox instructing you to hold on to your stock, because some explosive news is coming out any day that will cause the price of the stock to skyrocket.
A few days later, you, along with the other newsletter members, will receive a press release of some very exciting news regarding the stock you just bought. This news will be the beginning of a buying frenzy that could cause the stock to go up hundreds – and even thousands – of percentage points in a matter of days.
As the stock goes up, the pumpers of the stock are selling their shares before the frenzy is over, and the stock prices craters. Meanwhile, unsuspecting buyers are usually the ones left holding the bag.
Here’s a real life example: In December 2017, any company that put the buzzword “blockchain” in its name became one of the hottest stocks on the market. At the time, Long Island Iced Tea was a struggling beverage company that was unprofitable. When the company announced they were changing their name to Long Blockchain Corp, the stock went from $2.00 to almost $10.00 in a matter of two days. That’s almost a 500% move. Fast forward to today, and the stock is around 19 cents.
This was a classic pump and dump.
Remember, there is no such thing as easy money in stocks.
Pump and dump schemes will almost always cost you money.
My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.
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