Pump and Dump Schemes: How to Avoid Being Scammed

The pump and dump strategy is sometimes used by unscrupulous investors in order to take advantage of the market. Here are the basics of the pump and dump strategy and how you can avoid falling victim to it.

The Pump and Dump Strategy

With this strategy, someone will try to pump up the price of a particular stock through false statements and then sell their shares of the stock at the right time in order to take advantage of an inflated stock price. This is an illegal strategy and will commonly hurt smaller investors.

Avoiding This Tactic

This tactic will typically come in the form of what seems to be an expert stock tip. This happens when someone claims to have inside information about a particular stock. They start to spread the word about this supposed inside information through an e-mail newsletter or some other form of mass communication. This typically involves penny stocks that do not trade on the larger stock exchanges. Many unsuspecting investors end up purchasing shares of the stock, which drives up the price. When this happens, the original investors that pumped up the stock liquidate their shares as quickly as possible and take a profit. The easiest way to avoid this scenario is to not subscribe to these types of newsletters. Also, be very skeptical of people that claim a penny stock is about to go up substantially in price.