What is Pump and Dump in Stock market ?
In recent times, the term” pump and dump” has become increasingly popular in the stock market. It refers to a fraudulent practice where individuals or groups instinctively inflate the price of a stock by promoting it to unknowing investors, only to sell their own shares once the price reaches a high point. The most notorious illustration of this practice was depicted in the movie” The Wolf of Wall Street,” where Jordan Belfort and his associates pumped up the price of penny stocks before dealing them off to retail investors. This unethical practice can lead to significant losses for investors who are ignorant of the scheme. In this article, we will discuss some of the ways to stay away from pump and dump stocks.
WAYS TO AVOID FROM PUMP AND DUMP SCHEME
Originally, it was important to understand why some stocks are more susceptible to pump-and-dump schemes than others. Thinly traded stocks, especially penny stocks, are easier to manipulate because they have lower trading volumes and lower liquidity. Also, stocks with low requested capitalizations and those that aren’t listed on major exchanges are more likely to be targeted by pump and dump schemes. Thus, one of the stylish ways to avoid these schemes is to avoid investing in penny stocks and to concentrate on larger, more established companies.
Another way to avoid pump and leave stocks is to conduct thorough exploration before making any investment opinions. You should always probe the company’s financials, operation platoon, and business model before investing. Beware of stock tips that are promoted on social media or through unsolicited emails or phone calls. These tips are frequently part of a pump and dump scheme and are designed to bait investors into buying the stock. Always do your own exploration and analysis before making any investment decisions.
You should also pay attention to any red flags that may indicate a pump and dump scheme is underway. One similar red flag is when the stock price of a company suddenly drops for no apparent reason. This is frequently a sign that someone is trying to instinctively inflate the price of the stock. Also, if you see a lot of promotional accessories touting the stock, similar to fake news papers or spam emails, it’s likely that a pump and dump scheme is underway.
It’s also important to be aware of the regulatory environment surrounding the stock market. The Securities Exchange Board of India (SEBI) is in charge of overseeing the securities industry in India. They investigate and prosecute individuals and businesses that engage in fraudulent practices, such as pump and dump schemes. You can protect yourself from these types of scams by staying up to date on the most recent nonsupervisory developments. Eventually, one of the stylish ways to avoid pump-and-dump schemes is to diversify your portfolio. By investing in a variety of stocks, bonds, and other means, you can spread your risk and minimize the impact of any losses from a single investment. Also, if you do decide to invest in penny stocks or other high-risk investments, limit your exposure by investing only a small portion of your portfolio in these types of instruments.
ROLE OF SOCIAL MEDIA
Social media has become an important tool in the world of finance, allowing for the dispersion of information and the capability to reach a large followership snappily. Unfortunately, this power can also be used for unrighteous purposes similar as pump and dump schemes.
A pump and dump scheme is a type of investment fraud that involves instinctively inflating the price of a stock or other asset through deceiving or false statements in order to sell it for a profit. Social media has made it easier for fraudsters to spread false information to a large number of implicit investors snappily and cheaply, making it an ideal platform for pump and dump schemes.
In a typical script, a fraudster will use social media platforms similar as Twitter, Facebook,YouTube and Reddit to promote a particular stock, using false or inflated claims to allure implicit investors. The fraudster may use fake social media accounts to produce the vision of wide interest in the stock and drive up the price. Once the price reaches a certain position, the fraudster will sell their shares, causing the price to dip and leaving other investors with empty stock.
For illustration is the case of Dogecoin, a cryptocurrency that began as a joke but gained fashionability on social media platforms similar to Twitter and Reddit. In early 2021, Elon Musk twittered several times about Dogecoin, causing the price to swell. Still, the price snappily fell back down, leaving numerous investors with losses. In conclusion, social media has played a significant part in pump and dump schemes by furnishing a platform for fraudsters to spread false information and manipulate stock prices. Investors should be conservative of investment advice on social media and do their own exploration before making any investment opinions.
Here are some of the biggest pump-and-dump frauds that have taken place in India:
1 Satyam Computer Services – In 2009, the founder of Satyam Computer Services, Ramalinga Raju, admitted to inflating the company’s revenue and profits for years, leading to a massive fraud. The company’s stock price collapsed, and Raju was later convicted and sentenced to seven years in prison.
2 SpeakAsia Online – In 2011, SpeakAsia Online, a Singapore-based market research company, was accused of running a Ponzi scheme in India. The company lured investors with promises of high returns for completing online surveys, but it turned out that there were no actual surveys. The company’s stock price collapsed, and several executives were arrested.
3 Winsome Diamonds – Winsome Diamonds, a diamond exporter, allegedly defrauded banks of over Rs 7,000 crore by taking loans against fake exports. The company’s stock price collapsed, and the owner, Jatin Mehta, fled the country in 2016
4 PACL Limited – PACL Limited, a real estate company, allegedly defrauded investors of over Rs 49,000 crore through a Ponzi scheme. The company’s stock price collapsed, and several executives were arrested.
5 Kassa Finvest – Kassa Finvest, a Delhi-based stockbroker, allegedly manipulated the stock prices of various companies to earn a profit. The company’s stock price collapsed, and several executives were arrested.
It’s worth noting that pump and dump frauds are illegal and can lead to serious consequences for those involved. Investors should always exercise caution before investing in any stock and be wary of promises of high returns with little or no risk.
In conclusion, pump and dump schemes are a fraudulent practice that can lead to significant losses for unknowing investors. To avoid becoming a victim of these scams, avoid penny stocks and other thinly traded stocks, conduct thorough research before making any investment decisions, pay attention to red flags, stay up to date on the most recent nonsupervisory developments, and diversify your portfolio. By following these guidelines, you can better protect yourself from the pitfalls of the stock market and invest with confidence.
StockPe is the ultimate virtual trading app for novice and experienced traders alike. With real-time market data and a user-friendly interface, you can practise trading stocks, ETFs, and options risk-free. Sharpen your skills, test your strategies, and compete against other traders to earn rewards. Join the StockPe community today and experience the excitement of the stock market without risking a penny!