Pump and Dump (P&D) Scheme Definition
A Pump and Dump (P&D) scheme is a manipulative stratagem used in financial markets where the price of a security, often stocks or cryptocurrencies, is artificially inflated (‘pumped’) only to be sold (‘dumped’) when the price reaches high levels. This leads to colossal profits for the initiators at the detriment of later buyers who are left to bear the loss when the price plummets.
Pump and Dump (P&D) Scheme Key Points
- P&D schemes are a fraudulent form of market manipulation, prohibited under securities law.
- The initiators typically ‘pump’ the value of a security through false or misleading statements in order to attract investors.
- Once the price has been sufficiently inflated, the perpetrators ‘dump’ the stock for gain.
- New, inexperienced, or uninformed buyers who are attracted by the ‘pump’ often suffer substantial losses during the ‘dump’ phase.
What is a Pump and Dump (P&D) Scheme
A Pump and Dump scheme is a fraudulent market practice characterized by sudden inflation and subsequent deflation of a security’s price. This practice is generally orchestrated by brokers or substantial investors who boost the price by disseminating misleading or overhyped information to lure uninformed investors, essentially creating an artificial demand.
Who is involved in a Pump and Dump (P&D) Scheme?
The individuals behind a P&D scheme are typically large-scale investors or groups who hold significant positions in the security in question. Nowadays, they can also be online communities or social media influencers who have the power for market manipulation. The victims are usually uninformed investors who unsuspectingly buy the ‘pumped’ assets.
When does a Pump and Dump (P&D) Scheme occur?
P&D schemes can occur anytime, especially in unregulated or loosely regulated markets. They are especially prevalent in periods of high market volatility or around emerging markets, such as the realm of cryptocurrencies, where prices are susceptible to sudden changes.
Where does a Pump and Dump (P&D) Scheme happen?
P&D schemes can happen in any market but are more recurrent in the stocks and cryptocurrency markets due to their comparative lack of regulation and relative price volatility. They also frequently occur online, where misinformation can be easily spread and prices manipulated.
Why are Pump and Dump (P&D) Schemes executed?
The primary reason P&D schemes are executed is for financial gain. The initiators aim to profit significantly by selling off the inflated asset. However, this unethical practice causes financial harm to those who buy in during the ‘pump’ phase only to suffer losses in the subsequent ‘dump’.
How is a Pump and Dump (P&D) Scheme performed?
A P&D scheme is actioned through the dissemination of overly positive or outright false information about an asset, which leads to an unnatural surge in demand and price. The orchestrators then sell off their holdings at the inflated prices, causing a drastic drop in value and significant losses for later buyers who were enticed by the artificial hype.
