Pump and Dump
Updated: Mar 1
Article By Ayush Bangera
Ever realized when you see a stock, which is not showing any volatility, then suddenly sees a boom in the price over a short period of time.
The stock touches its peak rapidly and falls at the same speed.
It is not possible for retail investors to create such hypes. But a group of investors or scammers can do it easily.
How it is done?
A scammer sends a message across investor groups where a tip-off is sent about a stock. The message says that the stock has a corporate action coming in few weeks that might skyrocket its price. This news makes the stock a ‘hot pick’.
The message seems very convincing and also, the retail investor sees a little upward moment in the stock that further convinces them to take it.
The little up movement is created by the scammer and their group.
Which stocks are involved?
Stocks that are not actively traded or which are not so liquid. And are mostly in single-digit(Penny Stock). Recently GameStop Corp. and AMC Entertainment Holdings Inc became a big hit after a group of Reddit traders decided to inflate the price to create a short squeeze against shorter (Hedge Funds).
How investor gets trapped?
The investor sees the upward movement in stocks. Expecting it to further go up, they buy it without analyzing it. The stock goes up a little bit and then, it reverses and falls down rapidly. The investor doesn’t sell the stock because he expects it to bounce back. This is where it is emotionally trapped which leads to further loss.
Conclusion: Investors are advised not to listen to tips and messages that say to buy a stock that might give them massive returns in a couple of weeks.
Trade stocks that have good volume and are traded actively to avoid such traps.
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