Pump and Dump Stock Schemes - What Is a Pump and Dump? (2022)

Apr 13, 2020

In today's lesson, I'm going to teach you guys how to track pump and dumps and explain why they're so useful for you as a trader.

The penny stock market is filled with tons of pump and dumps, and once you figure out how they work, you can actually make a lot of profit off of them.

How Do You Know If It's A Pump and Dump?

The term pump and dump comes from what the stock price actually looks like on a chart.

It's very easy to depict, and most likely, you see it all the time but don't even know it, especially with stocks or "penny stocks" that are not that common or well known.

You'll probably notice a stock fluttering normally along, with just a steady consistent volume and price, and then all of a sudden out of the blue, for some reason you'll see a massive gain, with the price skyrocketing up 20-50% for a couple of days and then a massive fall.

As you become more and more experienced with trading, you'll start to notice that the same general ticker symbols or the same stocks tend to see these pump and dump patterns on a consistent basis.

So, let's get into what a pump and dump is.

The Breakdown

There are a few main parts of the pump and dump, just like pretty much any other trade.

The first part is the pump (the rise of the price and the hype begins) ,
The second is the selloff (where the manipulators of the scheme tend to make their profits and the peak of the "pump and dump" is achieved) ,
Third, which kind of corresponds to the selloff, is the dump (the massive sell off and eventual crash / decline in price of the stock).

The Pump

First of all, a group of people who own stocks of a company will get into a share and they'll decide to put it up on the public markets.

Being a penny stock, it might be on the OTC boards or it might be a pink sheet.

Generally speaking, these types of companies are not required to disclose any of their financials, so these companies are very prone to be manipulated if that's what the investors or shareholders are looking to do.

Often, when the owners of the company hold a lot of shares they'll decide to start working with some type of marketing firm or IR firm.

They'll say, hey, listen, I'll give you 10,000 or even 30,000 shares if you promote our company and post it around and hype it up so a lot of people buy it.

And that initiates the pump.

The hype being created around the company is usually false, because the company as a whole is just a shell.

The owners of the company aren't intending to hold the shares longterm for the growth and viability of the company, they're just trying to make a quick buck and a quick flip.

These pump and dumps can occur in the span of a few days or max a few weeks.

The Dump

The stock reaches that top share price due to the amount of marketing, IR (investor relations, think all those email blasts and what you might have known as the "boiler rooms" back in the day from those shady movies from the 90s), and advertising going on.

Once it gets to that peak, due to all the promotion and referrals, the shareholders, or the initial owners of the company, will choose to sell at a profit.

This leads to the dump in the price because there is such a large number of shares being sold.

These owners probably have 10- 20% of the company, so they might have millions of shares.

When they drop those shares onto the public markets, unfortunately, a lot of people end up in a loss, and this happens fairly quickly.

This type of dump can actually end up happening within a few hours.

It usually happens all in one day, and then the trickle effect will continue to linger over the next couple of days.

How to Spot a Pump and Dump

Now the key thing for you as a trader is to know when the stock is being pumped and to ride the wave on the way up, and then be able to sell at a good gain.

Obviously, if you get greedy, then you're going to be in trouble, but usually, you can lock in 10-30% profits and make a good return on your money.

So, then the key questions that come about are

How do I find these types of pump and dumps?
How do I know when they're happening?

As of today, in 2021, you can usually find almost all of the promotions shared on a website called OTCMarkets.com.

This site has really evolved over the last few years.

It used to be a couple different other sites, but the owners consolidated and now keep track of all of the different promotional email chains and advertising campaigns and pump schemes that all of these stocks are running.

So, the more promotional campaigns you see running against these stocks, the higher chance it will be a pump and dump.