Beware of the "Pump and Dump"

"Pump and Dump" is the name given to a stock scam, or scheme, involving the hype or promotion of a stock with the intention of providing large short term price movements in a low priced stock, often fraudulently.

There, I said it. I probably could have made that first sentence even longer, but then I would have run out of things to write about in the rest of this article.

If you aren't familiar with a "Pump and Dump", please keep reading so you are not taken advantage of by one.

When I owned a small business years ago, I used to receive Fax notices touting "The Next Big Stock" that was about to make its move. It seemed like it was several times a week I was receiving these Faxes, mentioning unknown microcap stocks that I shouldn't miss out on.

Even after regulations were put in place to stop these faxes from being sent, they still came. They always had lots of headlines about new breakthrough technologies or findings, and they also had a footer on the page with very small print.

If you bothered to try and read the footer print at all, or if you could make out what the small print said, you would have seen that the company or person sending the Fax was a Marketing company that was paid to promote the stock and build up hype.

By reading the Fax, you would have thought it was coming from a research firm, or analyst, that was laying out the technical and fundamental reasons for the particular stocks potential future price movement.

Fast forward a few years and we now see the same "Pump and Dump" schemes occurring on the internet, often through email methods and website promotions.

The intentions are the same- to build up interest and hype around a stock to cause a large increase in stock price, so that certain individuals can sell their shares into the market for huge profits.

One of the reason why this happens is because micro cap, low priced stocks such as OTCBB stocks and Pink Sheet Stocks do not have the same regulations and over sight as larger cap stocks. This causes many to slip through the cracks so to speak, often going unnoticed.

Since these are such low priced stocks, the volume that normally occurs on a daily basis usually amounts to a small total dollar amount being exchanged. Once interest and hype is introduced through promotion, the increase in interest causes abnormal spikes in volume making the prices skyrocket sometimes.

Afterwards, the trading activity returns to normal and the stock price typically returns to where it was before the manipulation, thus given the name "Pump and Dump".

This type of activity has been occurring for years because there are always people that believe that they can make money buying and selling a low priced stock because the price is so low (or cheap in their minds).

Even though the bottom of the page (or email) lists small print stating that the person or business sending out the information is being paid for marketing the stock, some people just don't seem to care.

Some of these Stock Promoters get paid $100,000 or more (in cash or shares of stock) to promote the stock (build interest, hype and manipulate in some cases). Once the stock starts moving higher, they are the first ones to sell their shares, and they even tell you that in the small print in some cases.

Below is a chart of a typical occurrence of a Pump and Dump. Note: I can't say that this was one actually, but the chart displays a typical price movement which is good for display purposes):

Pump and Dump

Notice that around 9:30 a.m. the stock price started moving higher and within a few minutes was up over 20%. Then, the selling started and the price lost everything it had gained. This chart only goes to 11:31 a.m., but the price moved even lower the rest of this day.

In this particular case, the average daily volume before this day was less than 40,000 shares traded in a single day. If you look, at 9:32 a.m. over 70,000 shares traded in a single minute! On top of that, a few days before, this stock was trading at $.10.

Another thing to watch out for is that if you happened to buy in as the price was moving higher, these stocks are so thinly traded normally, that when the time comes to sell your shares there may be a big delay between the time you place your order and the time it gets to where it needs to be to be executed. Even if you try and cancel an order on a low priced stock there may be a long delay in many cases. There just aren't many people handling transactions for stocks that don't normally trade much.

Sometimes this will go on for days or weeks as the promotion is spread out to try and look more natural, so don't be fooled. For more information on this topic, take a look at the SEC website.

Take a look at what happened to this particular stock on my Pump and Dump Follow-Through page:

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