Pump and dump schemes
Pump and dump schemes thrive on misinformation, hype and time pressure. Understanding how they work can help you spot red flags early, so you can make smarter investment decisions.
What is a pump and dump scheme?
A pump and dump scheme is a form of market manipulation. It’s a two-part act designed to mislead investors and generate profits for the perpetrators at the expense of unsuspecting investors.
First, promoters of the scheme spread false or misleading positive information around a particular investment to encourage investors, like you, to start buying shares. This inflates the price of the shares and is referred to as the ‘pump’, as more investors are convinced to start or continue buying the stock.
Once the price rises, the promoters quickly sell their shares at the inflated price. This is referred to as the ‘dump’ and it causes the shares to decrease in price leaving other investors with losses.
It’s illegal to manipulate markets or invest based on inside information. This includes pump and dump schemes that artificially inflate an investment for personal gain. If someone is found guilty, they can face severe penalties including fines and even imprisonment.
How you might be approached
One growing trend is the use of AI-generated videos, or deepfakes that are used to impersonate public figures or well-known personalities. You might see an advert or video of a trusted financial expert, influencer, or even a TV personality appearing to endorse an investment and encouraging you to invest. These are often fake, and designed to build credibility and urgency, to rush you into investing.
Have you ever seen a post on social media offering exclusive investment opportunities if you join an encrypted group chat? Group chats on messaging apps like WhatsApp, Telegram, or Discord are sometimes used by pump and dump organisers to make their operations seem exclusive or secretive but in reality, these are simply tactics to lure investors in.
These schemes are often seen in stock markets, where the price of individual company shares can be pushed up quickly through social media hype. Because prices can rise fast, it’s important to know what’s actually behind the increase, so you don’t end up investing in a pump-and-dump scheme. This also happens in the crypto world, where new coins or tokens can attract attention almost overnight through viral content, memes, along with the big and fast price changes that are common in crypto markets.
It’s important to be wary of anyone encouraging you to invest under time pressure. Even if you suspect it’s a pump and dump scheme, try not to get caught up in trying to outsmart the scheme. You can’t predict when the investment will be dumped, and you could lose all the money you’ve invested.
How to spot a pump and dump scheme
Group chats: If you are added to a group chat filled with people you’ve never met, especially if the conversation is focused on ‘hot tips’ or pressure to buy a particular investment, you could be dealing with promoters involved in a pump and dump scheme.
It’s important to be wary about advice or recommended investments from people you don’t know, always take time to do your own research before investing. If someone claims to be a financial adviser or is offering investment advice, you can check whether they’re authorised by searching them on the FCA Firm Checker.
How do you react to hype in the group chat? Find out your investor hype type with the Hype Type Revealer.
Unexplained price changes: A rapid and dramatic increase in the price of an investment, especially without news from reliable sources, reports, or major announcements to explain the increase is a huge red flag. Before investing, take some time to research the investment to understand exactly what’s driving the inflation. If the price has been static or declining for a period of time, and then suddenly increases without any clear reason, be cautious.
Guaranteed returns: Any promise of guaranteed, risk-free, or extremely high returns should be treated with suspicion. Markets never offer certainty, and returns aren’t guaranteed. Pump and dump promoters often use hype and FOMO to get you to invest. If the pitch sounds too good to be true, it probably is.
What to do if you suspect an investment is a pump and dump?
If you invest your money into a pump and dump scheme. You could lose all the money you’ve invested, even if it was through a regulated trading platform. If you suspect an investment might be a pump and dump scheme, here’s what you can do:
- Do your own research: Check reliable sources to verify information, rather than relying on what’s being shared in group chats or on social media. Make sure you understand the full picture before investing.
- Pay attention to sudden price jumps: If the price is shooting up out of nowhere, try to understand exactly what’s driving it. If there’s no real news or reliable data behind the spike, it might be a pump and dump scheme.
- Don’t let FOMO take over: If a group chat feels rushed or just not right, it’s totally fine to leave. These group chats usually pressure members to ‘act now’, posting screenshots of big wins that don’t look genuine, or shutting down anyone who asks questions. If this is happening and it doesn’t sit well with you, you can report the chat to Action Fraud.