The pump and dump scheme is usually an investment scam to fool people into investing in a particular stock. It is a period when people use their capital or some of their cash to invest in a stock to increase its volume, thus the pump part. However, once they have made the stock rise, promoters or influential people will hype up the stock to fool or deceive investors into investing.
Other than this, they promote it through cryptocurrencies and commodities. Once the investors or retail traders decide to buy the asset and continue to rise, they will exit their trades. Meaning, they will earn once they pull out their trades on the stock investment but will continue to decline, resulting in other investors losing. Thus, the dump part.
Since this is a common scam in investing, it is best to know when to identify if it’s a pump or dump scam.
Indicator # 1: Flat Liners
Suppose you decided to look into a certain stock and see that it is a flat liner, where they never made any move and only stationed at one place but suddenly decided to break out. If a flat liner has suspiciously risen quickly and unexpectedly, this is a sign that the stock is pumped and is the biggest clue of the pump and dump scheme.
Be suspicious as to why the prices have risen since prices don’t just start increasing out of nowhere for no apparent reason, especially for flat-liner stock that never shows any movement—a huge red flag.
Indicator # 2: Trading Surge
Together with the explanation above, if you see the volume of stock shares has increased from 0 to over a million is obviously unbelievable. It is impossible to increase the volume in a short period. Unless they have good promoters, who are good at fooling people into investing or have their way or technique to increase their volume.
Indicator # 3: Increased Public Advertisement
Since the scheme usually happens once the stock has pumped up, they will start advertising it to fool people into investing. Suppose you see an increased advertisement or public announcement received through mass email or any form persuading you into investing since it promises you large profits. In that case, it should be considered a red flag.
Since investing is a risk and there are chances of a loss, no one ever knows when you will gain profit. Additionally, whenever they publicize specific announcements or ads, they usually come up with sexy unbelievable stories with exaggerated relationships with people who might not be legit.
Indicator # 4: Development Stage Companies
Some companies are still in the development stage, with no revenues, offering you to invest in a particular stock. You should research the company’s background first before considering it since they haven’t built up a name for themselves yet and might just be a group of scammers waiting to fool you. They might also show that they are connected o related to people, which shows too good to be true revenues and contracts with certain people proving you what they offer is real.
They may also publicly announce that they have embarked on an Investment Relations Campaign, making you believe more that they are legit. However, if you did your research on the company’s background and see that the people associated with the company or the management team are the usual suspects in recent pumps and dumps scheme, the higher the probability that they’re offering the same thing again.
Indicator # 5: Penny Stocks
Since the people behind the scam won’t use all of their money in the stock since they’re all about the possible earnings they can have, most pump-and-dump schemes are just penny stocks. Penny stocks are the company’s stock that trades for less than $5 per share, and these penny stocks are more prone to manipulation; that is something you must remember. Always conduct your research when considering investing in a penny stock, and don’t just rely on what you see at the surface or their advertisement.
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