Question & Answer
What is a Pump and Dump?
Answers
A pump and dump scheme is where a group of people acquire a lot of shares in a very inexpensive company. Then they artificially hype the company via message boards and message boards. They will typically take a non-noteworthy news story and blow it out of proportion. Maybe a drug passed a certain stage in trials with the FDA that is inconsequential. All the unsuspecting victims will pile in and buy up the stock causing the price to go through the roof, since the stock price is so low. The people operating the pump and dump will unload their shares on the way up. Then everyone realizes that the news was not news at all, and the price starts to crash back down. The ones who don't have a stop loss, and hold on until the last minute are referred to as the "bagholders".
I hope this helps. My only recommendation is to stay away from very low priced stocks (aka penny stocks).
A scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company's stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.
The victims of this scheme will often lose a considerable amount of their investment as the stock often falls back down after the process is complete.
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