Pump and Dump is a scheme that is mainly used by the old “pals” in the market to get their profit in the easiest way. By pump and dump, we mean that “such actions, which are undertaken by a perpetrator or perpetrators who, at first, create false manipulation about a certain “low-rated stock” and sell it at higher rates and as a result, gain profit by exploiting the new trader economically”. So now the question is, how this scheme works? How do you pump and dump? What are the effects of pump and dump? Let’s have the insight to know the details:
Before studying the depth of “pump and dump”, let’s understand its mechanism. It is the game of supply and demand. A perpetrator buys a great amount of small or micro-cap stocks and manipulates false information about them by using different means of communication. As these stocks are illiquid, a small increase in their sale increases their price. As a result, the people rush to buy these stocks from the perpetrator, who might sell the stock by accumulating a large sum of profit. As soon as the perpetrator sell his share, the price decline drastically, which in turns, gives an invitation to the financial crisis to the “buyer”. Different methods are used by the perpetrator to “accomplish” their task. These are:
Classic Pump and Dump
As the name refers, it is a classical way to entrap people. In this method, the manipulated news was mainly spread using cold calls. Also, printing fake news in the newspaper, sending emails, messages in social media groups, launching campaigns on many social media platforms and also, entrapping the people by telling them so-called “confidential” news are such tactics that describe this method. Moreover, some dishonest stock promoters are also involved in it, which misguides the people and entices them to buy the stocks. Beware of these types of people.
This is another method in which the small brokerage firms recruit some brokers which sell the shares by exaggeration and manipulating false statements. The main aim of these brokers is to sell at least that amount of stocks which will help to increase the price of the stock. These brokers mainly use cold calling methods to entrap the people. Once the price of the stock is increased according to the desire of the brokerage firm, they sell their shares and earn a profit.
“Wrong Number” Scheme
This scheme is relatively new as compared to the mentioned above schemes. In this scheme, the perpetrator or a person hired by him deliberately sends a fake voice note in which he talks about some so-called “confidential” scheme that is to be launched soon in the market and as a result, its share will increase. After this, the fraudster may excuse the “innocent”. But most of the time, he succeeds in capturing the attention of the potential buyer. All of these schemes use different methods but their ultimate goal is the same: attract the potential buyer and gain your profit.
Graphical Representation of Pump and Dump Scheme
So far, we have verbally discussed the impact of the pump and dump scheme. Now, let’s have a visual insight into the Pump and Dump scheme with the help of the following graph. The graph is given below:
Above is the graph of a company, on which the Pump and Dump have played an important role in creating “temporary prosperity and rush” but, after some time, the decline is evident.
Modern Pump and Dumps
Modern pump and dump are organized within huge Discord and Telegram groups. In addition, the system has shifted from stocks to cryptocurrencies. And our bots are suitable for just such a group.