Pump and dump
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Companies with the characteristics of operating pump and dump
- A variety of reorganization activities, which include merger deals or change of share capital
- A very busy public relation department that blows its own trumpet. Issuing numerous press release announcing new deals and products, stating a strong potential and goods fortune to be made.
- Dubious connection and a high level of related party transaction
- Trading surge
How they operate?
- Claiming they have insider information about impending news
- Newsletter offering bias recommendations, which provides false, misleading or greatly exaggerated statements
- Touting a company as a hot stock with bright potential
- Post messages in chat apps, forum and social media
If it successful, it will entice investors to purchase shares of the target company. The increase demand, price and volume would convince more people to believe the hype and buy the shares as well.
- The promoters dump their shares and stop promoting the stock
- The price plummets, leaving investors holding stock that is worth significantly less than what they paid for
- They pick another company and start the cycle again
What company they pick?
- Micro or small cap stock
- Highly illiquid stock that can have sharp price movements when volume increase
- Major shareholders who agree to work alongside with the promoter
Is it legal?
No, it is illegal and can lead to heavy fines