Pump and dump is a form of microcap stock fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operators of the scheme ‘dump’ sell their overvalued shares, the price falls and investors lose their money. Stocks that are the subject of pump and dump schemes are sometimes called ‘chop stocks.’
While fraudsters in the past relied on cold calls made from ‘boiler rooms’ (outbound call centers selling questionable investments), the Internet now offers a cheaper and easier way of reaching large numbers of potential investors. Often the stock promoter will claim to have ‘inside’ information about impending news. They may also post messages in chat rooms or stock message boards urging readers to buy the stock quickly. Fraudsters frequently use this ploy with small, thinly traded companies—known as ‘penny stocks’ because it is easier to manipulate a stock when there is little or no independent information available about the company.
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The Daily Omnivore 