What is the Pump & Dump Strategy?

In this article, we will discuss

• What Is a Pump and Dump?
• How Does a Pump and Dump Trading Strategy Work?
• How to Identify a Pump and Dump Situation?
• How to Avoid Getting Involved in Pump and Dump Situations?
• Final Words
• FAQs

As a newcomer in the stock market, you will have questions on how to choose stocks and make profits from them. However, the market comes with its share of risks, including the risk of falling prey to scams that lead to massive losses. The pump and dump strategy is an illegal activity carried out by fraudsters that can lead to a total loss of investment.

In this article, we will shed light on pump and dump strategies every new investor must be aware of and how you can identify such scenarios.

What Is a Pump and Dump?

Pump and dump trading strategy is a manipulative plan where a person tries to boost a stock’s price artificially using fake recommendations. The recommendations in such cases are misleading, false or highly exaggerated statements.

Individuals using this strategy usually have a large position in the stock. They create hype in the market for the stock, leading to a high demand and an increase in share price. As soon as the price peaks, they sell off their large position, making substantial profits while other investors face losses.

You must remember that pumping and dumping is an illegal activity as per securities law. If found guilty, the perpetrator will be fined, get their accounts frozen or barred from the securities market. India's regulatory bodies such as SEBI (Securities and Exchange Board of India) play a key role in monitoring the market and preventing such schemes.

If you are a new investor, don't panic after learning this scheme, as prevention strategies by SEBI actively work to protect investors from such nightmares.

How Does a Pump and Dump Trading Strategy Work?

When you see a market suddenly getting a lot of attention on social media or through fake news, it's important to decide whether to invest or stay away. The reality is that pump and dump schemes happen in all markets and timeframes. So, it's crucial to know when to enter or exit a market that might be manipulated.

To assess a promoted product, start by identifying warning signs, and indicating the best times to avoid the market. Once you've done that, you can look for positive signs to make your investment. If you ignore the warning signs initially, your desire for profit might lead you to overlook them later on.

How to Identify a Pump and Dump Situation?

Identifying pump and dump in the stock market can be tricky, especially if you are a new investor as the fake news is designed to sound real. However, you can follow these tips to identify such situations:

• Always check for warning signs when you hear anything about the price of shares. It can include signs like aggressive promotions, unsolicited tips and significant spikes in volume.
• Before entering into the share market, check different websites of circumstances where pump and dump strategies were implemented and their impact. Having past knowledge about schemes can always help to stay one step ahead in such scenarios.

How to Avoid Getting Involved in Pump and Dump Situations?

To avoid getting involved in a pump and dump scheme, you can take the following precautions:

• Affinity fraud targets specific groups such as religious or ethnic communities, older persons, or professional organisations. You can avoid it by never taking unsolicited advice. Just because someone in your organisation gives investment advice, doesn’t mean you should take it.
• Be very cautious if you get unexpected offers to invest your money. These offers might come through emails, social media messages, direct messages, or phone calls. It's important to ignore these messages because acting on them could lead to significant losses.
• Take the time to research and investigate before investing your money. You can easily find information online about legitimate companies, including their business plans, management, and financial statements. If you can't find this information, it could be a warning sign.
• Look for warning indicators that an investment may be a fraud. A common saying in financial markets is "If something seems to be too good to be true, it probably is". If someone pressures you to invest in something, it is a warning sign.

Conclusion

Overall, the pump and dump strategy has been going on in the financial market for a long time. But with the latest tools available in the market to track price trends and sufficient knowledge of stock market basics, you can avoid these scams.

As a trader, it is important to be aware of how the share prices are behaving in the market and identify possible pumps and dumps. To make this task easy, download the New Gen SAMCO app that gives you information about market behaviour continuously. You can get daily market calls, weekly stock outlooks, relevant market insights, and other stock recommendations to assist you in buying the best equity available in the market and maximise your investment. Also, if you want to save money on brokerage fees, this app is ideal.

Don't wait anymore. Download the SAMCO app and enjoy trading benefits from today!

Frequently Asked Questions

Q1. How to avoid getting scammed with a pump and dump strategy?

Ans.You can avoid getting scammed with the pump and dump strategy by following tips such as being extremely careful, avoiding unsolicited investment advice, looking out for affinity fraud, conducting research and studying past similar situations.

Q2. What is a reverse pump and dump strategy?

Ans. The reverse strategy of pump and dump is called "Dump and Pump" which works oppositely. First, cheap stocks are dumped onto unsuspecting investors, and then demand is stimulated (pumped) which helps to appreciate the stock value and earn big profits during resale.

Q3. Is pump-and-dump allowed in the Indian stock market?

Ans. In the context of the Indian stock market, pump-and-dump activities are strictly prohibited. They are classified as market manipulation according to the regulations set by the Securities Exchange Board of India. Engaging in such activities can result in serious consequences, including fines and imprisonment.

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