“Pump and Dump” schemes
A “Pump and Dump” scheme consists of two basic components:
1. the “Pump” happens when the stock of a publicly traded company is heavily advertised to lure investors into buying a stock, and
2. the “Dump” happens when insiders, their relatives, their friends or third-party investors sell their stock to investors who were just lured into buying it.
Unfortunately for many investors, it is extremely easy for unscrupulous people to engage in pump and dump campaigns. Internet message boards, chat rooms and forums are filled with people who aggressively promote companies in an effort to pump the stock, while they are dumping theirs. However, the Internet is not the only way stocks are pumped. Pump and dump schemes often use broadcast fax, phone texting, direct mail campaigns, boiler room cold-calling, Google advertising and an unbelievable amount of email spam. Often, the “pump” is associated with a great-sounding press release or third-party research report. Pump and dump activities are illegal.
Before you buy a penny stock or any stock, do your homework and use your brain. If it sounds too good to be true, take a deep breath and investigate before calling your broker.