The Logistics Behind an Email "Pump and Dump"
If you have an email address, then there is a good chance that you've received at least one email recommending you to purchase a specific stock.
If you happened to look up the stock in Yahoo! Finance, then you probably noticed that the stock likely trades for just pennies and basically has no volume.
The purpose of the email recommendation? Whomever is sending it is likely trying to "pump and dump" the stock that is being recommended to you. What does this mean exactly?
A "pump and dump" is exactly as it sounds. Somebody is looking to "pump" up the price of a stock, and then "dump" it as soon as the stock rises in price.
How is how it works.
The person sending out the email recommendation will scour the stock market for stocks that fit a certain criteria. This is usually a stock with a low float that trades for just pennies. A low volume stock is preferred as well. If the stock has some kind of a story that can be told (such as a breath-taking new product soon to hit the market), then even better.
A stock with a low float and low volume will tend to move very quickly if people start to buy it. This is an extremely important point for someone looking to manipulate the price of a stock.
Now that the "pump and dump" artist has their stock located, they will now start buying shares for themselves. Let's say that they are going to "pump and dump" stock XYZ. XYZ is trading at 20 cents per share. The "pump and dump" artist might purchase say, 100,000 shares over the course of a month. They now have $20,000 worth of shares, and are ready to begin the "pump".
This person likely purchased a large number of email addresses from someone else. They could literally have millions of email addresses that they will be sending this recommendation out to. It's strictly a numbers game - the vast majority of people will not even read the email, but if 10-20 of the recipients read the email and buy the stock, then this will become a profitable venture for the "pump and dump" artist.
Now they will send out an email blast, touting the stock. The SEC requires that they disclose how many shares that they own, but of course many people tend not to do this. They'll just talk up the stock, hoping to send the readers into a frenzy. What they don't mention is that they are looking to dump their shares for a profit as soon as people start buying. This buying interest will not only lift the price of the stock, but it will also allow them to dump their own shares.
Normally they will send out multiple emails using many different deceptive titles. The entire point is convincing the receiver of the email to open up the message.
When people do start buying, the person behind the "pump and dump" will immediately try to dump their shares. They will usually bank a profit and then move on to the next stock.
Before you start thinking that this would be a great way to make some short-term money - this practice is illegal and outlawed by the SEC. Try it, and you might find yourself in major trouble. What kind of trouble? You'll likely be forced to return the "ill-gotten" gains, plus pay a sizable penalty. If the SEC wants to make an example out of you, then you may find yourself behind bars.
Think about it - you are tricking other people into buying a near-worthless piece of stock. There is an excellent chance that the people who "panic-buy" because of the email will end up losing a considerable amount of money.
Next time you receive an email recommendation to purchase a stock from somebody that you don't know, there is a good chance that they are trying to execute a "pump and dump". Don't fall for it. Only buy and sell stocks that you have thoroughly researched yourself.
Filed under: General Knowledge