Ever realised when you see a stock, which is not showing any volatility, then suddenly sees a boom in the price over a short period of time. The stock touches its peak rapidly and falls with the same speed.
It is not possible for retail investors to create such to hypes. But a group of investors or scammers can do it easily.
How it is done?
A scammer sends a message across investor groups where a tip-off is sent about a stock. The message says that the stock has a corporate action coming in few weeks that might skyrocket its price. This news makes the stock a ‘hot pick’. The message seems very convincing and also, the retail investor sees a little upward moment in the stock that further convinces them to take it. The little up movement is created by the scammer and their group.
Which stocks are involved?
Stocks which are not actively traded or which are not so liquid.
How investor gets trapped?
The investor sees the upward movement in stocks. Expecting it to further go up, the they buy it without analysing it. The stock goes up a little bit and then, it reverses and falls down rapidly. The investor doesn’t sell of the stock because he expects it to bounce back. This is where is is emotionally trapped which leads to further loss.
Example of Pumping and Dumping:
Investors are advised not to listen to tips and message that say to buy a stock that might give them massive returns in a couple of weeks.
Trade stocks that have good volume and are traded actively to avoid such traps.
Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for dstreetanalyser.com in order to promote financial literacy among the general public.