Market Manipulation (“Pump and Dump”) Fraud


What is Market Manipulation (“Pump and Dump”) Fraud?

Market manipulation fraud, also known as pump and dump, refers to a type of fraud that involves investors misleadingly promoting stocks and then selling once the price has risen. Scammers use various tactics to mislead investors into buying certain stocks, thus raising their price. Once enough people have purchased the stocks and their value has risen, the fraudulent investors then sell their shares, which causes the price to drop significantly. The scammers earn huge sums of money, while new investors lose their money.

Because of the Internet, pump and dump scammers can now reach a much larger amount of people, thus making market manipulation easier. Investors often use forums, social media, messaging/calling services like Discord and Telegram to spread their misinformation. Market manipulation fraud is carried out by multiple groups that coordinate rumors and misinformation to artificially hype up the security, which raises its price.

Most often, pump and dump fraud involves manipulating microcap (penny) stocks specifically. Microcap stocks are stocks of companies with a market capitalization of around $50 million – $300 million. Generally, microcap stocks are traded over-the-counter at a low price. Information about microcap securities can be manipulated much easier by fraudulent parties. The fact that it’s much harder to find publicly accessible information about them also works to their advantage as potential investors will not be able to verify the claims. It’s also worth mentioning that microcap stocks are very illiquid securities with low trading value, which means that even small transactions in comparison can cause the price of the security to increase.

How to avoid market manipulation fraud

If you are a new investor, there are a few things you should keep in mind in order to avoid becoming a victim of market manipulation fraud.

  • Be extremely skeptical of unsolicited investment offers.

Be very cautious if you receive unsolicited investment opportunities. You may be approached in a number of ways including emails, private messages, text messages, phone calls, voicemail, etc. No matter how amazing the opportunity appears, ignore this kind of communication. Nothing good will come out of acting on these offers, and you will end up losing your money.

  • Be wary of hyped-up opportunities.

The pump and dump fraud is based on hyping up investment opportunities so do not believe the hype. If you come across forum posts or receive messages with invites to invest in certain stocks and the opportunity is hyped up quite significantly, be very wary and do not engage.

  • Be aware of affinity fraud.

Affinity fraud refers to a form of investment fraud in which scammers try to take advantage of members of identifiable groups, such as the elderly, religious or ethnic communities, language minorities, etc. If you are approached by a member of your community, particularly if they are influential, their credibility may seem much more believable. If someone from your community approaches you with “insider information” about an investment opportunity, do not immediately engage. Look into the claims but if you cannot verify them, do not participate.

  • Verify claims.

If you come across posts or messages that claim to have information about an investment opportunity, make sure to independently verify the claims as much as possible.

  • Know the “red flags”.

An offer that seems too good to be true is a red flag, as are promises of massive “guaranteed” returns. Be very skeptical of such offers, as nothing good will come out of them.

  • Do your own research.

Before investing, always do diligent research. It should not be difficult to find the information you need to make an informed decision, even by using a regular search engine. Look for information about a company’s prospects and controversies, as well as their financial statements.

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