The anatomy of a pump-and-dump

While seasoned investors might be familiar with pump and dump schemes, they are still out there and they still find a way of leaving a lot of traders holding the bag.

With this manipulative scheme, pump-and-dumpers will find a way of boosting a stock’s price by means of fake recommendations.

This practice is illegal under securities law and if found can lead to some pretty heavy fines (but that has never stopped people from trying).

How does a pump-and-dump work?

The way a pump-and-dump works is actually quite straightforward. In fact, the reason why it keeps happening successfully is probably due to its simplicity.

Usually, these schemes would focus mainly on micro-caps and/or small-cap stocks but they quickly found their way into the cryptocurrency industry.

So, first off, whoever is planning to pump-and-dump stocks must establish a position in that company’s stock.

Then, since the idea is to sell their position at a higher price, pump-and-dumpers will hype the stock as much as possible and by any means necessary.

This means that social media boards will get flooded with greatly exaggerated claims about the company, “rumors”, and other false and misleading exacerbated statements.

How do pump-and-dumps get spread?

Before the advent of the Internet, pump-and-dump schemes were often done via cold calling people.

However, nowadays, there has a been a clear shift into the online world as thousands of emails or message board posts can be spread instantly in hopes of finding unsuspecting targets and entice them to make haste and buy a specific stock.

As you can very well see on many social media platforms, these posts will contain false claims.

Typically, the original poster will assure other users that he has access to privileged information, either posing as an insider or with access to juicy insider leaks.

By doing so, the pump-and-dumper will attempt to earn the trust of other users and may even try to fabricate evidence of his claims.

How do people buy into pump-and-dump schemes?

The answer lies on the very next step of this scheme: creating “FOMO” ( fear of missing out

Fear of Missing Out

FOMO is an acronym that stands for the “Fear of Missing Out”. This captures the feeling that many retail traders feel with regards to volatile assets. The term is most commonly associated with cryptocurrencies though it can be extended to any type of investment instrument. Newer or less experienced investors are constantly dealing with psychological pressures when investing in assets. In the case of cryptocurrencies, what is in many ways an emergent field has given way to hysteria in some cases, with asset’s value rising seemingly overnight. Understanding FOMOFOMO can drive investors to do things like quickly selling other assets in order to have the opportunity to buy a particular asset that they are afraid of missing out on.Because cryptocurrency markets move so quickly, FOMO plays a huge role in the value of any cryptocurrency. Trading cryptocurrency can be an emotional rollercoaster. Indeed, cryptocoins rise and fall in value on a daily basis, experiencing volatility far in excess of more normalized assets such as stocks or currencies. Pegged as a purely psychological phenomena, FOMO captures many of the potential issues that traders must deal with when investing, be it cryptocurrencies or anything else.As a rule of thumb, it is important not to let emotions dictate all of your actions as a trader . Oftentimes, traders are not even aware that FOMO may be affecting their trading behavior. When approaching volatile assets, proper and sound decision making should always be utilized and in almost every case, there is always another chance at a future date to have an opportunity to invest.

FOMO is an acronym that stands for the “Fear of Missing Out”. This captures the feeling that many retail traders feel with regards to volatile assets. The term is most commonly associated with cryptocurrencies though it can be extended to any type of investment instrument. Newer or less experienced investors are constantly dealing with psychological pressures when investing in assets. In the case of cryptocurrencies, what is in many ways an emergent field has given way to hysteria in some cases, with asset’s value rising seemingly overnight. Understanding FOMOFOMO can drive investors to do things like quickly selling other assets in order to have the opportunity to buy a particular asset that they are afraid of missing out on.Because cryptocurrency markets move so quickly, FOMO plays a huge role in the value of any cryptocurrency. Trading cryptocurrency can be an emotional rollercoaster. Indeed, cryptocoins rise and fall in value on a daily basis, experiencing volatility far in excess of more normalized assets such as stocks or currencies. Pegged as a purely psychological phenomena, FOMO captures many of the potential issues that traders must deal with when investing, be it cryptocurrencies or anything else.As a rule of thumb, it is important not to let emotions dictate all of your actions as a trader . Oftentimes, traders are not even aware that FOMO may be affecting their trading behavior. When approaching volatile assets, proper and sound decision making should always be utilized and in almost every case, there is always another chance at a future date to have an opportunity to invest.
Read this Term).

After assuring the crowds that their source is good, the info itself will almost always be about a company’s imminent development which is just about to lead to an inevitable and dramatic price upswing.

That’s when they go in for the kill

As buyers begin to jump in, the stock’s price will obviously start to move up.

As buying pressure builds up and the price reaches the pump-and-dumpers desired target, they proceed to sell their shares and close out their position.

In the process, the price will begin to take a significant tumble or even drop dramatically and, whoever fell for the scheme will get left holding the bag.

Which stocks do pump-and-dump schemes target?

The most commonly targeted stocks are micro-caps and small-caps on OTC exchanges due the less restrictive regulations. They do so because those are easier to manipulate given their small float, limited company information, and very low trading volume.

Cryptocurrency Pump-and-Dump

Crypto pump-and-dumps are becoming increasingly prevalent. As the crypto space still lacks regulation

Regulation

Regulation is a key attribute of any forex broker in the retail industry. When investing money with a brokerage it is important to first see if they are regulated as this affords several client protections and safeguards. This is not unlike any other industries with a high net worth, that rely on transparency.Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Why Regulation Matters in FXThere are several regulators globally that help police the forex industry. Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry. First and foremost, regulators help ensure the filing of reports and transmission of data to help oversee and monitor the activity by brokerages. Moreover, regulators also serve as a deterrent against market abuse and malpractice by brokers. Brokers that engage in services with clients must adhere to a set of rules that ensure they are in fact authorized to provide investment activities in a given jurisdiction. Unfortunately, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation. Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors. In terms of reporting, retail brokerages are also required to regularly file reports about their clients’ positions to the all requisite authorities. Brokers also typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.

Regulation is a key attribute of any forex broker in the retail industry. When investing money with a brokerage it is important to first see if they are regulated as this affords several client protections and safeguards. This is not unlike any other industries with a high net worth, that rely on transparency.Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Why Regulation Matters in FXThere are several regulators globally that help police the forex industry. Regulators such as the UK’s Financial Conduct Authority (FCA), the US’ Securities and Exchange Commission (SEC), Australian Security and Investment Commission (ASIC), and the Cyprus Securities and Exchange Commission (CySEC) are the most widely dealt with authorities in the FX industry. First and foremost, regulators help ensure the filing of reports and transmission of data to help oversee and monitor the activity by brokerages. Moreover, regulators also serve as a deterrent against market abuse and malpractice by brokers. Brokers that engage in services with clients must adhere to a set of rules that ensure they are in fact authorized to provide investment activities in a given jurisdiction. Unfortunately, many unauthorized or unregulated entities will also seek to market their services illegally or function as a clone of a regulated operation. Regulators are essential in snuffing out these scam operations as they prevent significant risks for investors. In terms of reporting, retail brokerages are also required to regularly file reports about their clients’ positions to the all requisite authorities. Brokers also typically outsource the reporting to other companies which are connecting the trade repositories used by regulators to the broker’s systems and are handling this crucial element of compliance.
Read this Termit is important to be on the lookout especially when dealing with new coins or thinly traded ones.

How to avoid pump-and-dump schemes?

First things first: trust no one and do your own research.

By being extremely wary of unsolicited investment advice and doing your own research you will grow healthier investment habits.

Throughout your investment journey you will certainly be met with dubious investment opportunity pitches in many different communication channels.

Ignore them, stick to your own strategy, and remember to keep an eye out for the pump-and-dump’s obvious red flags:

  • Being pressured to buy right now as it is about to shoot up
  • Investment proposal which sounds too good to be true
  • “Guaranteed” returns
  • Affinity fraud: schemers often prey upon users of identifiable groups, whether that’s online or in real life (examples include: a specific subreddit, the elderly, religious communities, and so forth).

wrap-up

In a pump and dump, all you ever see is hype.

Fundamentals are simply out the window and hype is all that matters.

Since the first in make the most, it pretty much works as a Ponzi scheme for stocks.

So, if you see it happening, think to yourself: is it worth taking a chance?

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