Some language you just hear beaten to death; nowhere is this more true than in the online realm. Information is repeated and copied and pasted and redundantly driven into your brain until it becomes second nature. One investment community term you hear beaten to death in the online message boards and chat rooms is “pump & dump.” Pump & dump is also a term that the CNBC talking heads reference back to occasionally; legitimate financial journalism; Money, The Wall Street Journal, The New York Times; also will take to using pump & dump in their reporting. It’s good because being abreast of this type of news helps investors from getting burned. At the same time pump & dump has been so continuously used that it’s almost lost its meaning and certainly lost its resonance. The truth is that pump & dump schemes are real enough and they happen every day in the stock market. If you are adept enough you may be able to make some sweet money off of a purported pump & dump scenario; as an individual investor you need to be very wary of many of the microcap and sub penny stocks in particular where pump & dump has become par for the course.
Pump & Dump Schemes: What They Are: To get the textbook definition of a pump & dump scenario, it’s important to go to a reputable source. The SEC defines pump & dump as “the touting of a company’s stock (typically microcap companies) through false and misleading statements to the marketplace. After pumping the stock, fraudsters make huge profits by selling their cheap stock into the market.” The rise and fall of stock prices is what the stock markets are all about, right? Well, yes, but the difference is that a pump & dump is an artificial inflation of stocks prices and a flooding of the marketplace with the shares of stock which have no reason for rising.
Pump & Dump Schemes: Why Are They Done: Pump & dump schemes may seem to nullify the validity of the stock market and drive legitimate investors away from speculative investments. Like folks panning for gold or looking to strike it rich in oil, pump & dump schemes may just be laying the groundwork for future genius. Unfortunately most investors who get “burned” by a pump & dump stocks scheme will often cut their losses and sell so that they can get out with something. Pump & dump schemes are often committed online as the legitimate financial news outlets usually won’t bother covering microcap or penny stock investments.
Pump & Dump Schemes: Legacy: Pump & dump schemes may sometimes be little more than capital raising exercises for what could be legitimate companies. A company with 10 million shares of stock which is trading down may try to raise capital by issuing new shares to the marketplace and hiring ‘pumpers’ to tout their stock so that the incidental rise in interest, shares traded, and share price will attract new investors. Regardless of the inevitable drop in stock value when scared investors go running for the door, pump & dump schemes can be a great buying opportunity for the microcap stock investor. If you’ve been charting a stock and new shares have been introduced and you’ve been hearing a lot of pump-chatter and you’ve been able to sit out the excited rise and inevitable fall in share price, you may be looking at a stock whose reached a relative bottom for the time being. Buying in at bottom levels can be very rewarding as there are still likely a number of shareholders who did not sell during the ‘dump’ period and want their investments to rise again. If a good company is just going through some growing pains and appears poised to make a move upwards, just after a dump from a pump & dump may be a good time to be investing new capital!