Pump and Dump
What it is:
How it works (Example):
In a pump and dump scenario, an investor or group of investors holding a long position in a low-price, small-cap stock unfoundedly publicize the stock as a promising opportunity. Susceptible, credulous investors subsequently purchase shares which, collectively, lead to a rise in the stock's price due to heightened demand.
Once the original perpetrators have decided that the price of the stock has peaked, they sell off the entirety of their positions for a profit. Subsequently, the false advertising campaign ends and the stock price returns to its original level.
Why it Matters:
Pump and dump scams are an illegal practice punishable by heavy SEC fines. With the advent of easily accessible and effective advertising via the internet, pump and dump scams have become more common in recent years. Though investment advice such as stock tips can be convenient, investors are strongly advised to perform their own research on recommended stocks in order to avoid get-rich-quick scams such as pumping and dumping.