What Is a Pump and Dump Scheme and How To Avoid Them

Watch the full video here: I’m Exposing the Chinese PUMP & DUMP Scheme!

When I first started trading, I’ll admit that I was naive. Like many beginner traders, I got caught up in a pump and dump scheme and suffered a huge trading loss. It was a hard lesson, but it taught me the importance of recognizing the warning signs before it’s too late.

Now, I want to make sure you don’t fall into the same trap because I’ve seen countless traders fall victim to pump and dump schemes, losing not just their money but also their confidence in the process.

Pump and dump schemes are among the stock market’s oldest tricks, and unfortunately, they’re still around, lurking in everything from penny stocks to cryptocurrency. By the end of this article, I’ll explain how these scams work, how to spot them, and how to protect yourself so you can trade smarter.

What Is a Pump and Dump Scheme?

A pump and dump scheme is what it sounds like. Scammers “pump” up the share price of a stock—usually a cheap penny stock or microcap stock—with misleading hype, only to “dump” their shares at the inflated price.

When the dust settles, unsuspecting investors are left as bagholders, often watching the price of a stock plummet to a fraction of what they paid. Pump and dump schemes are a form of securities fraud that manipulates unsuspecting investors.

Let me put this in perspective: Imagine a stock trading at $1 per share. Fraudsters spread buzz—through social media, chat rooms, or even fake press releases—claiming it’s about to skyrocket. The stock climbs as more people buy in. However, as the excitement peaks, the scammers sell their shares, triggering a massive sell-off.

The result? A wave of unsuspecting investors left with worthless stock, wondering how it all went wrong.

How Do Pump and Dump Schemes Work?

Now, let me break this down step by step so you can see exactly how these scams unfold:

• The Hype: Fraudsters start with an easy-to-manage stock—usually a small-cap or over-the-counter (OTC) stock with low trading volume. They create hype through social mediaapps like Telegram, Twitter, or Reddit, often claiming “inside information” or “the next big thing.”

• The Pump: As buzz builds, more and more people jump in, pushing the stock’s share price higher. The sudden surge in trading volume makes it look like the stock is on fire.

• The Dump: Once the price peaks, insiders sell off their shares at the inflated price, causing the stock to crash. Retail investors, who bought into the hype, are left scrambling as the price freefalls.

How To Spot a Pump and Dump Scheme

To be safe, it’s important to identify signs of a pump and dump scheme when investing in the stock market. These scams use misleading information and hype, which can be challenging to recognize if one does not focus carefully.

Here are key indicators to watch for:

Unexplained Price Surges

A sharp and sudden price increase without receiving material information, a high or low earnings alert, or a new product release is always alarming.

Excessive Hype on Social Media

Avoid the hype and discussion in chat rooms, Telegram, or other social media platforms with little credibility, especially when the stocks are very actively pumped.

Scammers running fake Facebook ads using my name and image

Targeting Penny Stocks, Microcaps, and Cryptocurrencies

Since low trading volume provides a wide range of stocks with low market capitalization, fraudsters prefer to invest in these shares as they can manipulate them easily.

Fake or Misleading News

Advertisements containing potential technicalities that the buyer or consumer cannot substantiate should be regarded as a scam, such as insider information or a company’s discovery.

Suspicious Trading Patterns

Pay a lot of attention to the high increase in the trading volume in relatively inactive stocks.

The Risks of Falling for a Pump and Dump Scheme

I’ve seen countless traders, especially beginners, fall victim to pump and dump scams, losing money and confidence in their trading abilities. It’s heartbreaking to watch, but understanding the risks can help you avoid becoming a cautionary tale.

• Massive Financial Losses: Stocks often crash as fast as they rise.
• Emotional Distress: Panic and regret can cloud future decisions.
• Trust Issues: Falling for scams creates skepticism in legitimate trades.
• Potential Legal Trouble: Unknowingly trading manipulated stocks can backfire.
• Lost Opportunities: Money tied up in scams misses real investment opportunities.

Protecting yourself starts with being informed and cautious. Recognize the signs and stay sharp!

How To Protect Yourself

If you’re wondering how to avoid trouble, don’t worry; you’re in safe hands.

Here are a few steps you can take to protect your investments:

• Do Your Own Research: Never jump to conclusions or believe what people say about the chances of a given stock rising in value. Use actual financial statements, documents on record at the Securities and Exchange Commission (SEC) filings, or other reliable sources and business, as well as financial news.
• Beware of Hype: If it sounds too good, it is most likely a scam. Beware of new stocks and promoters hyping them up without any tangible information to support their claims.
• Focus on Quality Stocks: Only go for strong-offering firms with good basic earnings and relatively high market capitalization. Avoid small-cap and over-the-counter (OTC) stocks altogether or trade minimally.
• Use Trusted Platforms: Do not trade based on rumors you get from fake social media handles or random chat rooms.
• Know Your Limits: Use stop-loss orders to decrease the risks involved, and never trade beyond your means of loss-making.

Real-Life Example of a Pump and Dump Scheme

Let me share a quick example to drive this home.

CHSN is a Chinese small-cap stock that perfectly illustrates a pump and dump scheme. Driven by aggressive speculation, the stock surged from $4 to over $40 within a day. Social media and chat rooms buzzed with exaggerated claims, encouraging unsuspecting investors to jump in.

This CHSN chart shows a pump and dump: the stock spiked from $4 to $40 before crashing back down.

But just as the stock peaked, insiders and early promoters sold off their shares, triggering a massive crash back to $12—leaving retail investors to bear the brunt of the losses. This kind of price manipulation is a hallmark of pump and dump schemes, and CHSN serves as a cautionary tale for anyone tempted by sudden market hype.

Wrapping Up

Pump and dump schemes are a trader’s lousy dream; however, armed with adequate information, one is unlikely to fall prey. The danger lies in overreliance on such information rather than being cautious, conducting your research, and always knowing that no stock should be traded based on hype.

I’ll tell you this: Day trading is very risky, but the competitions are rewarding if you understand the game well. As you become aware of the signs of scams, you will be able to safeguard your trading portfolio and do very well in the market.

Want to become a pro trader? The idea should be to continue to learn and fine-tune your skills. But remember, each trade is an educational experience—so keep focused, stay informed, and trade wisely.