Stock prices move up and down all the time. That’s a normal part of investing. But sometimes, these price movements aren’t natural and can be the result of market manipulation. One common type of manipulation is what’s called a pump-and-dump scheme.
If you’ve spent any time scrolling through investment forums or social media, you may have come across “stock tips” or claims that a stock is “about to take off.” But not all of these tips are genuine. In some cases, they may be part of a strategy designed to mislead investors for someone else’s gain.
In this blog, we will take a closer look at what a pump-and-dump scheme is, how it works, and what you should watch out for.
A pump-and-dump scheme occurs when individuals or groups artificially inflate a stock’s price by creating hype and spreading false or misleading information. As the price rises and more investors buy in, the scammers sell their shares at a profit—causing the stock to crash and leaving other investors with significant losses.
These schemes often target low-volume or lesser-known stocks, where a small increase in trading activity can cause a big price movement.
A pump-and-dump scheme is exactly what it sounds like. First, the price of a stock is pumped up, drawing in unsuspecting investors, before the scammers dump their holdings at a profit. This type of market manipulation typically unfolds in five distinct stages:
1️⃣ The promotion begins: A little-known stock suddenly gains attention. It may be discussed heavily on social media, investment forums, or private chat groups. In some cases, individuals may receive direct messages from scammers claiming to have inside knowledge of an opportunity. The message is always the same, that the stock is "about to take off," and now is the time to invest.
2️⃣ The pump: As more investors buy in, driven by the fear of missing out (FOMO), demand increases. This pushes the stock price higher, creating the illusion of strong market interest.
3️⃣ The peak: With trading volumes soaring, the stock reaches its highest price. At this stage, the scammers are preparing to sell their holdings.
4️⃣ The dump: The scammers begin offloading their shares at an inflated price, locking in their profits. Meanwhile, others continue to buy, unaware that the scheme is about to collapse.
5️⃣ The crash: With no real demand to support the stock, the price falls sharply. The scammers have already cashed out, while later investors are left with shares worth far less than they paid.
Pump-and-dump scams rely on deception, creating the illusion of a great investment opportunity. While the tactics may vary, there are common warning signs to look out for:
🚩 Unsolicited stock tips: Be cautious if you receive investment advice from a stranger, whether through social media, forums, or direct messages on platforms like WhatsApp or Telegram. Scammers often pose as experienced traders or insiders to gain your trust.
🚩 Impersonation of reputable firms: Scammers may also pose as regulated brokers, investment firms, or well-known traders. Remember, Freetrade will never instruct you to buy an individual stock. If someone claiming to be from Freetrade reaches out via WhatsApp or social media, it’s a scam.
🚩 Guaranteed returns: Claims of “risk-free” profits or promises of specific percentage gains (e.g., “50% return in days!”) are red flags. No legitimate investment in the stock market comes with guaranteed returns.
🚩 Pressure to act quickly: Scammers create urgency, telling you to buy immediately before you “miss out.” This is designed to stop you from researching the stock properly.
🚩 A focus on unknown or low-volume stocks: These schemes often target stocks with little trading activity, where price movements can be easily manipulated. If you’ve never heard of a stock before and there’s sudden excitement around it, take a step back.
🚩 False reassurances: If the stock price drops, scammers may tell you not to worry, insisting that it will “bounce back overnight.” In reality, they have already exited their position and moved on.
While pump-and-dump scams can be deceptive, there are steps you can take to protect yourself:
✅ Do your own research: Before investing, check the stock’s fundamentals, recent news, and financial statements from credible sources. Be cautious if the only information available is from social media or unknown websites.
✅ Verify before you trust: If someone claims to be an expert or insider, question their motives. Freetrade will never contact you to pressure you to invest.
✅ Avoid emotional decision-making: Scammers rely on FOMO and urgency to push investors into buying quickly. Take a step back and assess whether the investment makes sense.
✅ Think long term: Successful investing is about making informed decisions, not chasing trends. If a stock’s price has risen rapidly without clear reason, it may not be sustainable.
Pump-and-dump scams are designed to create excitement and pressure investors into buying quickly, often resulting in significant losses when the price crashes. The best way to protect yourself is to stay informed, take your time, and approach any investment with a critical mindset.
Remember, if something sounds too good to be true, it usually is!
For more tips on how to stay safe while investing, visit our Fraud and security centre.
