Pump and dump is one of the schemes used by operators or scammers to dupe traders and retail investors , it’s a way by which scammers or operators artificially inflate the price of a stock and trap innocent traders and retail investors who seeing the astronomical bullish trend in the stock jumps into the rally.
How does this scam work ?
So let us understand how does this scheme actually works, so firstly they have to choose a firm having low float and market capitalization so that they can manipulate it easily , so here penny stocks are chosen due to their nature of being manipulated easily. When they have chosen the stock they start investing in the stock heavily thus making the stock rise , together with it they give tips to innocent buyers through telegram channels or by cold calling them and ask them to buy the stock as it will rise , some are trapped in these free stock market tips and buy such stocks , the stock keeps rising due to such retail investors buying , now seeing the astronomical bullish trend in stock even the traders jump on the stock because they don’t want to miss the rally .
Just when all this happens and the operators now realize that they have made enough profits , operators sell all their holding in a few days slowly , all the sell orders are absorbed by the retail stock traders and investors , but when the buyers dry up it leads to excess supply in market and possible Lower circuit in the stock , now the ones that are trapped are those retail investors and traders , the operators move on to some another stock to manipulate , while the people trapped are left high and dry , hence the scheme is called pump and dump scheme.
Example of pump and dump scheme –
Above is an example of Alok Industries a penny stock which rose astronomically , everyone bought it , most bought at the top of Rs.50 , after the operators realized their profit , they dumped the stock and now this is stuck in Lower circuit for weeks and all the traders remain trapped because there are no buyers.
So the question here remains is how can we remain alert and not fall pray to such antics of operators , it’s simple , there are two things you should do –
1. Don’t chase the market , let the market to come to you , if you chase a rising stock you will be left trapped because there will be no area of value nearby to act as support , a stock that rises astronomically will fall even more astronomically.
2. Secondly avoid penny stocks that is stocks having low float and market capitalization as they are the prime target of operators to execute such schemes.