The Pump and Dump
If you are new to the stock market, you might be wondering what is a pump and dump?
A pump and dump involves the hyping of a tiny company’s stock so that insiders or stock promoters can sell their shares at a higher price for a profit.
Pump and dumps are usually associated with penny stocks, which means stocks that trade on the OTCBB and Pink Sheets (OTC Markets).
The pump and dump has been around forever and with the internet it has made this scheme much easier to do.
Here is basically how a pump and dump works …
Stock promoters or company insiders that are about to pump a stock buy up hundreds, thousands, or even millions of shares of the company that they are about to pump.
They then try to hype the stock. They might use websites, press releases, or send out thousands of e-mails or mail publications to drive interest to the stock urging people to buy shares in the company.
When traders and sometimes naive investors buy the stock, this causes the share price to move higher, sometimes doubling in price or even more.
Insiders and stock promoters then sell their shares (the dump) at a profit and causes the share price to fall back down. Many naive investors that didn’t get out in time are typically left holding a stock that decreased in value from their initial buy in price.
The reason penny stocks are often pumped is because they are much easier to move and manipulate because they have a low float. Low-float stocks tend to be much more volatile than stocks with larger floats.
Simply put, the “float” of a stock is the number of shares available to the public for trading. It boils down to supply and demand. Because their is a limited supply, stocks with a low/small float can make major moves either to the upside or downside.
Past Examples of a Pump and Dump
One recent example of a pump and dump is the stock SWVI. SWVI was pumped by AwesomePennyStocks.com, formerly the largest stock promoter.
SWVI was pumped in February 2013. When the stock first began it was trading in the .20-.30 cent. The stock quickly reached $1 per share in about 2 weeks. After it hit the $1 high, the stock quickly crashed down to under .10 cents in the following weeks. See the chart below.
How to Spot a Pump and Dump
The good news is that pump and dumps have plenty of recognizable warning signs. Here are some waring signs of a pump and dump.
You may have gotten an email from a penny stock website or an unknown person touting a stock as a “strong buy” that “could make a fortune” for early investors.
To aid in the stock promotion, the company that is being hyped often issues press release after press release announcing new deals and products. A current example is GOFF Corp. which is an AwesomePennyStock.com pump. Along with the stock pump, the company issued numerous press releases during the pump.
If a stock trading over-the-counter goes from very low trading volume one day to high trading volume the next, then chances the stock is about to be pumped or is currently being pumped.
Stock promotions often take place on these late night tv shows. One such example is MoneyTV with Donald Baillargeon. MoneyTV is a TV interview show that profiles tiny, unknown companies. These companies pay or give stock to MoneyTV to be featured on the show.
Check the past involvements of company insiders and officers, such as a CEO, and see if they have been involved with other companies that have been promoted in the past. If they are then chances are they will be involved again with the current company they are with.
It is important to understand that many of these companies that trade over-the-counter are in the business of selling stock of their company so that company can stay financed and keep growing. There are also some companies that are setup as an enrichment scheme to benefit the company’s insiders and are a not a real company at.
Penny stocks should never be invested in the long term. This is why we trade penny stocks.
As part of Trade.education, PrePump Spotter specializes in spotting stock pumps before they begin. We teach you how to make money playing penny stock pumps.