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Earlier this month, the US Justice Department and the SEC charged several social media influencers with conspiracy to commit securities fraud through a series of pump-and-dump schemes.
- A pump-and-dump scheme is a market manipulation tactic in which a group of shareholders uses misleading (or blatantly false) information to inflate share prices.
How it works: Schemers buy a lot of a company's stock at a low price. Then they coordinate a campaign to create hype around the low-value company, targeting retail investors' FOMO on this "can't miss" stock.
- Investors buy shares based on this bad info, raising the price (or "pumping" it).
- Once the stock price is high enough to satisfy the schemers' greed, they "dump" their shares, making a nice profit. But that lowers the share price significantly for everyone else left holding the bag.
The biggest problem with pump-and-dump schemes is that they are hard to identify in real time.
- Particularly in the age of social media, where there's so much information flying around at once, it’s often challenging to sort good info from fake news.
- They also tap into people's desire to be "early investors," promising big returns on small investments.
Some pump-and-dump red flags to look out for:
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Overly aggressive sales tactics and unsolicited offers. If the stock is that good, investment "advisors" don't need to reach out to strangers.
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A "big gains" guarantee. Are you being promised outsized returns in a short time frame? That’s never a good sign.
- Lack of information. If you can't find any credible information that backs up the "too good to be true" tagline, don't buy.