There are LOTS of financial scams out there. In fact, consumers lost almost $9 BILLION in 2022 alone. (2023 data is not available yet.) And one of those scams is a pump and dump scam. Here’s how it works.
What is a Pump and Dump Scam?
A pump and dump scam is where someone who holds a substantial percentage or sum of an investment hypes up the stock and touts it as “the next big thing” or something similar in hopes that the price of that asset will increase dramatically.
After the price has increased dramatically, then the person who holds a substantial amount of it abruptly sells it.
The person who is “hyping up” the asset will often use exaggerated, misleading, or outright false information to try to convince you to purchase it.
Usually this is done through the power of social media.
To create a better picture in your mind of pump and dump scams, just think of the movie The Wolf of Wall Street (with Leonardo Dicaprio). This is one of the illegal things that the stock brokers of Stratton Oakmont would do to enrich themselves.
Examples of Pump and Dump Scams
There have been several pump and dump scams before. But some of the most famous are:
- Stratton Oakmont (The Wolf of Wall Street)
- Enron in the early 2000s
- Various penny stocks
- Several cryptocurrencies (the Squid Game crypto scheme was the biggest)
In the case of Enron, they were doing a lot of illegal dealings. However, the largest one was pump and dump. The leaders of the company were making false financial records and lying on earnings calls and to shareholders about the profit the business was making.
And right before the company crashed down, they sold most of their stock while the price was at an all-time high.
Penny stocks don’t fall into pump and dump scams as much anymore because of the amount of regulation that falls upon the financial sector. But until the early 2000s, this sort of scam was somewhat commonplace among penny stocks.
And lastly, cryptocurrencies are the most common place to find pump and dump scams now.
The crypto market is largely still unregulated. Virtually anyone can create a cryptocurrency and say what they want about it with little recourse.
The most famous example of this is the Squid Game coin.
Final Thoughts
Financial scams unfortunately happen. But you can do what you can to ensure that they don’t happen to you. If you are thinking about an investment, make sure to do your research on it. Don’t buy it just because you see it going viral on social media. Make sure that it is a good investment for you.
You can do this!
I am here for you!
Until next time!
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