Pumping a stock until the price surge, selling it, and leaving the investors involved empty-handed is the definition of a pump and dump scam. Pump and dump scammers gain their profit by manipulating illiquid stocks and luring mostly amateur investors in. The only way to avoid such type of fraud is by learning thoroughly about investing before jumping into anything.
How pump and dump scammers get you trapped in the fraud
Investopedia blatantly defines this scheme as a fraud. In proceeding with the scam, investors first promote a certain stock. In promoting the stock, these bad investors will play their words and exaggerate the stocks to assure investors how promising their stocks are. A lot of times, what they say is mere bluff and misinformation. Once their stock’s demand surge, they sell the stock at high prices to make a large short-term gain.
Stocks that are vulnerable as objects of a pump and dump fraud
Pump and dump perpetrators usually stocks that are easy to manipulate, such as micro-, small-cap stocks, or new assets like cryptocurrencies. Investors need to trade micro- and small-cap transactions over the counter, which is why scammers easily target these stocks. Overall, illiquid stocks usually become the media for pump and dump schemes. Scammers manipulate the stock’s fast-shifting supply and demand so they can sell the stocks once the price and volume surge.
Pump and dump schemes in the modern age
Traditionally, perpetrators of such fraud often launch the scheme through cold calling. Perpetrators nowadays utilize the internet to commit the illegal practice. Online messages are have now become the new media for them to launch the fraud. The whole scheme itself is more or less the same.
Avoiding investment scams
The most essential thing in investing is a thorough investigation. If you think an investment is too good to be true, it most probably is. There is almost no such thing as large investment and quick return. Don’t easily fall into other people’s sweet talks, and take your time to find out the truth in the stocks.
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