What is Pump & Dump Stock?
Pump and dump stock is a type of fraud that involves artificially inflating the price of a stock through false or misleading information, and then selling the shares at a profit once the price has risen.
In a pump and dump stock, a group of investors or individuals work together to promote the stock, often using false or exaggerated claims about the company’s prospects or financial performance to attract unsuspecting investors. This can be done through various means, such as social media, email campaigns, or online chat rooms. As more investors buy into the stock, the price rises due to increased demand, which further attracts more buyers.
Once the stock price reaches a certain level, the scammers sell off their shares, causing the price to crash and leaving unsuspecting investors with significant losses. Pump and dump stocks are illegal and considered to be a form of market manipulation. They can harm not only individual investors, but also the overall stability and credibility of the stock market.
It’s important for investors to be cautious and do their own research before making investment decisions, and to be wary of any unsolicited investment advice or information.
How Pump and Dump Stock is Carried Out?
Pump and dump of stocks is a fraudulent scheme where a group of individuals artificially inflate the price of a stock through false or misleading information, and then sell their shares for a profit once the price has risen. In the Indian stock market, pump and dump schemes can be carried out in various ways.
Here’s a detailed explanation of how a typical pump and dump stock works in the Indian stock market:
- The Scammers: The scheme is typically carried out by a group of scammers who have access to inside information about the company or its financials. The scammers may also be stockbrokers or market makers who can manipulate the stock’s price.
- Promotion: The scammers use various channels, such as social media, online chat rooms, or email campaigns, to promote the stock to potential investors. They often make exaggerated or false claims about the company’s prospects or financial performance to create a buzz around the stock.
- Artificial Price Inflation: As more investors buy into the stock, the demand for it increases, and the price of the stock rises. The scammers may also use their own money to purchase large quantities of the stock, which further inflates the price.
- Dumping of Shares: Once the stock price reaches a certain level, the scammers sell their shares for a profit, causing the price of the stock to crash. This leaves unsuspecting investors with significant losses.
- Exit by Scammers: The scammers exit the market and move on to other fraudulent schemes.
Read More: How Oil Prices Affect Stock Market
Who All Are Involved in Pump and Dump Stock
Pump and dump stocks are usually orchestrated by a group of individuals who work together to inflate the price of the stock and then sell their shares at a profit. The following are the main players involved in pump and dump schemes:
The promoters are the individuals who create the hype around the stock, usually through social media, email campaigns, or online chat rooms. They make false or exaggerated claims about the company’s prospects or financial performance to attract unsuspecting investors.
Stockbrokers are individuals or firms who act as intermediaries between buyers and sellers of securities. In a pump and dump scheme, the stockbrokers may be involved in artificially inflating the price of the stock by buying large quantities of it or by providing misleading information to their clients.
3. Market Makers:
Market makers are financial institutions that buy and sell securities on their own account, usually to facilitate trading in the market. In a pump and dump stock, market makers may be involved in artificially inflating the price of the stock by buying large quantities of it.
4. Small Investors:
Small investors are the individuals who buy the stock based on the hype created by the promoters. They are often left with significant losses when the price of the stock crashes after the scammers sell their shares.
It’s important to note that pump and dump schemes are illegal and considered to be a form of securities fraud. All individuals involved in such schemes are subject to legal action by regulatory authorities.
Read More: What is Passive Investing In The Stock Market
How to Identify Pump and Dump Stock?
“Pump and dump” is a type of stock market manipulation that involves artificially inflating the price of a stock through false or misleading statements, and then selling off the shares at a profit once the price has risen.
Here are some traits that can be used to identify pump and dump stock:
1. High trading volume:
One of the hallmarks of a pump and dump scheme is a sudden surge in trading volume for a particular stock. This is because the manipulators need to generate excitement and interest in the stock to get others to buy in. As more people buy in, the stock price rises, allowing the manipulators to sell off their shares at a profit.
2. Large price spikes:
Pump and dump stocks often experience sudden and unexplained price spikes that are not supported by any underlying fundamentals or news about the company. These price spikes can be very steep and may occur over a very short period of time.
3. Limited information:
Pump and dump stock often involve companies with little or no information available to the public. This makes it easier for the manipulators to create a false narrative about the company and manipulate the stock price. They may make false claims about the company’s financial health, future prospects, or upcoming news.
4. Unsolicited investment advice:
If you receive unsolicited investment advice, especially if it is overly positive or hyped up, it may be a sign of a pump and dump scheme. The manipulators often use social media, email, or other forms of communication to reach potential investors and convince them to buy into the stock.
5. Social media activity:
Pump and dump manipulators often use social media platforms to promote their stocks and spread false information. They may create fake profiles or use bots to generate hype around a particular stock. Watch out for sudden spikes in social media activity around a particular stock, especially if it seems orchestrated.
6. Lack of transparency:
Pump and dump stock often involve companies that are not transparent about their financials, management, or operations. This can make it difficult for investors to make informed decisions about the stock. The manipulators may deliberately obscure important information about the company to make it seem more attractive to potential investors.
If you suspect that a stock is being manipulated in a pump and dump scheme, it’s important to be cautious and do your own research before investing. Look for reliable sources of information about the company, such as its financial statements, SEC filings, and news articles.
Be wary of any investment advice that seems too good to be true, and avoid stocks with sudden price spikes or unexplained trading volume. By doing your due diligence and being vigilant, you can protect yourself from falling victim to a pump and dump scheme.
Examples of Pump and Dump Stock
Here are two examples of pump and dump stock in the Indian stock market:
1. “Penny Stocks” Pump and Dump Scam:
In 2013, the Securities and Exchange Board of India (SEBI) had found that several operators were involved in a pump and dump scheme in so-called penny stocks (low-priced stocks with a small market capitalization).
The scam involved creating a false market for these stocks by trading among themselves and using circular trading (buying and selling among a group of traders) to inflate the price. The operators would then sell their shares at a profit, leaving small investors with losses. SEBI had taken action against several entities involved in this scam.
2. “Bhushan Steel” Pump and Dump Scam:
In 2018, it was alleged that several traders and brokers had used WhatsApp messages to manipulate the share price of Bhushan Steel, a steel company listed on the Indian stock exchange. The scam involved spreading false news about the company’s financial performance and future prospects to create a demand for the stock.
The price of the stock rose by over 20% in a single day before crashing down once the scam was exposed. The Securities and Exchange Board of India (SEBI) had taken action against several entities involved in this scam as well.
3. Satyam Computer Services:
In 2009, the chairman of Satyam Computer Services, one of India’s largest IT services companies, admitted to inflating the company’s profits for years. This caused the stock price to plummet, leading to significant losses for investors.
4. GTL Infrastructure:
In 2012, GTL Infrastructure, a telecom tower company, experienced a sudden surge in trading volume and price, prompting an investigation by the Securities and Exchange Board of India (SEBI). The investigation revealed that the stock price had been artificially inflated through a pump and dump scheme.
5. Ricoh India:
In 2016, Ricoh India, a subsidiary of the Japanese multinational imaging and electronics company, experienced a sudden and inexplicable increase in its stock price. The SEBI launched an investigation and found that the company had manipulated its financial statements to artificially inflate its profits and stock price. This led to significant losses for investors who had bought into the stock at the inflated prices.
So these were few examples of pump and dump stock from Indian stock markets. Hopefully the blog was able to shed some light on how to identify pump and dump stock.