Glossary term
Pump and Dump
Subject: Financial Crime, Market Abuse
Also known as: Ramp and dump
In a pump and dump, promoters buy a cheap security, talk its price up with misleading hype, and sell into the buying that follows, leaving latecomers with losses.
Explanation
The scheme has three steps. First the promoters collect a cheap holding, often in a small or illiquid stock. Next they promote it hard through spam, social media, messaging groups or paid tips. Finally they sell into the surge in demand, and when the promotion stops the price collapses. Penny stocks, microcap companies and low-value crypto tokens are common targets because they have little public information and few buyers. Modern versions often run on messaging apps with countdowns and “signals”. The conduct breaches market manipulation and securities fraud laws. Warning signs are sudden price and volume spikes with no news, promotion from unknown sources and promoters who hold the shares. Regulators suspend trading in suspect stocks, and brokers restrict orders. Most of the losses fall on small retail investors who bought near the peak.
Example
One promoter buys 30% of the free shares of a loss-making microcap at a very low price. He sends tips to 50,000 subscribers claiming a secret contract. Volume multiplies and the price rises sevenfold in a week. He sells most of his holding near the top, the tips stop and the price falls 90%. The regulator freezes his accounts.
Not to be confused with
- Bear Raiding
- The opposite move: pushing a price down in order to profit from the fall.