Have you heard about the Pump-And-Dump Scam? Here's How It Works For Cryptocurrencies And Stocks

The Pump-and-Dump scam in the crypto and stock markets

Pump and Dump scam

Cryptocurrencies and stocks are volatile investment avenues wherein the prices fluctuate constantly. The prices depend on a lot of external and internal factors, factors that fraudsters and scammers can manipulate.

Investors looking for quick gains might resort to fraudulent trading strategies. One such strategy is the Pump-and-Dump scam which allows investors to buy low and sell high, thereby making a considerable gain. Let’s understand what the scam is all about.

What is the Pump-and-Dump scam?

The Pump-and-Dump scam is an unscrupulous trading strategy wherein fraudsters buy stocks or currencies at a reduced price, spread fake positive news to inflate the prices and then sell their holdings to book returns.

The scam manipulates the price of a stock or a cryptocurrency with the intention of generating exponential returns for the fraudsters.

How does the Pump-and-Dump scam work?

The scam is an elaborate one consisting of two parts. First, fraudulent investors or traders buy stocks or cryptocurrencies trading at a low price.

Once bought, the fraudsters spread false information about the company or the currency to create a positive market perception about the same. They resort to various means to spread fake news that outlines that the stock or the currency is poised for exponential growth.

The fake news creates positive hype around the stock or cryptocurrency, and more and more investors start investing in the same. This creates buying pressure on the stock or the cryptocurrency and inflates its price. This is the first part of the scam, called the pumping phase.

Once the prices are inflated, fraudsters sell the stock or the cryptocurrency, thereby booking a handsome profit on the trade. This is called the dumping phase, wherein selling pressure pulls down the price of the asset.

While fraudulent investors book handsome profits before dumping their stocks or currencies, other investors, who remained invested, lose as the prices fall.

Related - Here's how you can spot and avoid a Ponzi scheme

How to prevent getting trapped in the Pump-and-Dump scam?

The Securities and Exchange Board of India (SEBI) is proactively trying to eliminate these fraudulent practices from the stock market. The regulator keeps a watch on companies, and their financial statements, tracks fraudulent SMSs that can be sent to gullible investors to coax them to participate in the scam and also educates investors about these practices.

While SEBI does its duty, you, as an investor, should also be vigilant against possible scams so that you can stay away from them.

Here are some tips on how you can avoid becoming a victim of a possible Pump-and-Dump scam –

  1. Do not believe in ‘hot tips’ - Most often than not, you might receive promotional SMSs or WhatsApp notifications talking about ‘hot tips’. These hot tips ask you to invest in stocks or currencies that might double in the near future.

    Remember, there’s no guarantee of returns in the stock or crypto market. These so-called hot tips are nothing but a strategy to spread fake news. So, stay away from such tips. Do not act on them.

  2. Do your due diligence - Before you invest in a stock which has great market hype surrounding it, do your due diligence. Companies publish their quarterly reports regularly. Go through the reports to find out the profitability and future prospect of the company. Despite the market publicity, if the company’s financials are unstable, you better stay away from it.
     
  3. Look out for red flags - There are various red flags that point to a scam. Things like limited-time offers, buy now or lose, exceptional returns, and insider information-based advice are strict no-nos. If you read anything of this sort, do not invest.
     
  4. Do not trust investment advice given by people you don’t know - Fraudsters use social media influencers, so-called stock experts and analysts to spread fake news. So, do not trust the word of a stranger. Do your due diligence, don’t invest blindly.

The bottom line

While you cannot stop scams, you can surely stay away from them. it’s your hard-earned money, after all!

So, understand how the Pump-and-Dump scam works and how you can identify it. When investing in stocks and crypto, do your research and invest in established names for safety.

Related - Here are some common financial scams and how you can avoid them.

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