The Pump and Dump is a scheme that occurs when there is an overvaluation in the price of a share or other financial assets through misrepresentation.
This technique, known as “Pump and Dump”, is considered fraud and may have legal consequences for those who practice in Latin America.
How Pump and Dump Happens
This scheme can be carried out through different means of communication, such as through the Internet or through calls from telemarketing operators, to propagate a fully inflated price of a company’s shares.
The scam is carried out by people or groups, who own shares in a certain company, and seek to transmit false information that there will be an intense growth of the business that involves these actions.
As a result, potential investors are misled into buying stocks with a value much higher than the market rate.
In this strategy, the “pump” is known as the stage where the asset’s overvaluation occurs, while the “dump” is the next stage where the asset’s sudden devaluation occurs.
Rollover typically occurs with the natural reaction of the financial market when there is high supply and low demand, causing the asset to depreciate.
Pumping and dumping can be very common when they involve very low value stocks, usually in pennies, where price swings are common.
Pump and Dump Cases
A famous bomb and landfill case was portrayed in the movie “The Wolf of Wall Street” where stockbroker Jordan Belfort carried out this practice with pennies in the United States.
In addition to corporate actions, this scheme has been introduced in the midst of cryptocurrencies when users buy very cheap coins, spread false news on forums on the subject and sell them at high prices.
The cryptocurrency market is still poorly regulated and this type of scam has been common, especially with coins that have little margin and little liquidity.
This process has become more common with the advent of the Internet, so it is necessary to carefully analyze the causes of sudden appreciation of stocks, cryptocurrencies or other assets.