Pump and Dump

What Is Pump-and-Dump?

Pump-and-dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements. The perpetrators of this scheme already have an established position in the company’s stock and sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.


  • Pump-and-dump is an illegal scheme to boost a stock’s price based on false, misleading, or greatly exaggerated statements.
  • Pump-and-dump schemes usually target micro- and small-cap stocks.
  • People found guilty of running pump-and-dump schemes are subject to heavy fines.

Pump And Dump

The Basics of Pump-and-Dump

Pump-and-dump schemes were traditionally done through cold calling. But with the advent of the internet, this illegal practice has become even more prevalent. Fraudsters post messages online enticing investors to buy a stock quickly, with claims to have inside information that a development will lead to an upswing in the share’s price. Once buyers jump in, the perpetrators sell their shares, causing the price to drop dramatically. New investors then lose their money.

These schemes usually target micro- and small-cap stocks, as they are the easiest to manipulate. Due to the small float of these types of stocks, it does not take a lot of new buyers to push a stock higher.

Pump-and-Dump 2.0

The same scheme can be perpetrated by anyone with access to an online trading account and the ability to convince other investors to buy a stock supposedly ready to take off. The schemer can get the action going by buying heavily into a stock that trades on low volume, which usually pumps up the price.

The price action induces other investors to buy heavily, pumping the share price even higher. At any point when the perpetrator feels the buying pressure is ready to fall off, he can dump his shares for a big profit.

Pump-and-Dump in Pop Culture

The pump-and-dump scheme formed the central theme of two popular movies, “Boiler Room” and “The Wolf of Wall Street” – both of which featured a warehouse full of telemarketing stockbrokers pitching penny stocks. In each case, the brokerage firm was a market maker and held a large volume of stock in companies with highly questionable prospects. The firms’ leaders incentivized their brokers with high commissions and bonuses for placing the stock in as many customer accounts as possible. In doing so, the brokers were pumping up the price through huge volume selling.

Once the selling volume reached critical mass with no more buyers, the firm dumped its shares for a huge profit. This drove the stock price down, often below the original selling price, resulting in big losses for the customers because they could not sell their shares in time.

Avoiding Pump-and-Dump Schemes

Investors should be wary about notices that a stock is about to take off – especially when they are unsolicited – no matter how tempting it may be. Consider the source and check for red flags. Many notices come from paid promotors or insiders, who should not be trusted. If an email or newsletter only talks about the hype and doesn’t mention any of the risk, it’s probably a scam. Always do your own research in a stock before making an investment.

The Securities and Exchange Commission (SEC) has some tips to help avoid becoming a victim.

Real Life Example of Pump-and-Dump

A study conducted in 2018 examined the prevalence of pump and dump schemes in the cryptocurrency market, an area that is predominantly unregulated. Researchers identified more than 3,700 different pump messages and signals advertised on two popular cryptocurrency messaging boards between January and July 2018, urging investors to buy specific coins.

Related Terms


To corner in an investing context is to gain control over a business, stock, or commodity to the point where it is possible to manipulate the price.


Cowboy Marketing

Cowboy marketing describes a situation in which a company is unaware that what looks like legitimately opted-in email campaigns is actually using mass spam emails to promote a stock.


What Is Securities Fraud?

Securities fraud is a form of white-collar crime that disguises a fraudulent scheme in order to gain finances from investors.


Penny Stock Reform Act

The penny stock reform act sought to clamp down on fraud in non-exchange-listed stocks priced below $5 that generally trade in the over-the-counter market.


What Does “Cats and Dogs” Mean?

The phrase “Cats and Dogs” refers to speculative stocks that are lightly regulated and traded over the counter (OTC).


How Penny Stocks Trade and How Investors Can Buy Them

A penny stock typically refers to a small company’s stock that trades for less than $5 per share and trades via over-the-counter (OTC) transactions.


1 point

Is the fine greater than the profit? if no, we should start doing this :stuck_out_tongue:

2 Points

I wasn’t expecting this thread to be about stocks…

1 point

The other option was…

1 point
1 point

Pump and dump is only bad if you are still pumping when it starts dumpin :slight_smile:

2 Points