What are the indicators that a stock is currently being pumped for a later dump? If one were watching the market what would they need to look for in order to identify a stock as a victim of pump and dump?
Pump-and-dump scams are indeed very real, but the scale of a single scam isn't anywhere near the type of heist you see in movies like Trading Places. Usually, the scammer will buy a few hundred dollars of a penny stock for some obscure small business, then they'll spam every address they have with advice that this business is about to announce a huge breakthrough that will make it the next Microsoft. A few dozen people bite, buy up a few thousand shares each (remember the shares are trading for pennies), then when the rise in demand pushes up the price enough for the scammer to make a decent buck, he cashes out, the price falls based on the resulting glut of stock, and the victims lose their money.
Thus a few red flags shake out that would-be investors should be wary of:
- You've never heard of the company. Not a huge red flag by itself, but a little research into the company, where they are, what they do, etc is in order.
- Total market cap of the stock will be in the high six to low seven figures; enough that one guy couldn't buy all the shares (or would be legally required to announce an attempt to do so, with a "cool-off" period to let the market absorb that news), but a thousand unwitting suckers can make a dent. Again, not necessarily a problem; lots of publicly-traded companies get along just fine on a couple million in capitalization, but be very wary of a sudden surge; look for real news triggering the uptick.
- Pump-and dumps are often cyclical; they'll try the same scheme many times on the same stock before people get tired of losing on the downtick. If you've seen the stock move up and down significantly many times over the course of a week or two, especially if the moves don't match the market, stay away; even if it's not being manipulated it's way too volatile for you to realize a reliable gain.
- Pump-and-dumps almost always involve unsolicited e-mail alerting potential victims to this "opportunity of the century". This is a HUGE red flag; check your spam folder for anything recently received regarding this stock. If anyone you don't know personally is telling you to buy this stock, or if they're using language the ostensible sender wouldn't ever use, steer clear.
Pump-and-Dump strategy is happening everywhere. Less so in developed market. I can tell an experience from Emerging Market perspective. Usually several securities brokers work together to pump several "penny" stocks (5 - 7 stocks).
They conspire together and searching for several investors, who have money and willing to participate in this scheme. These investors will then agree to invest (usually with Margin from securities) to start pumping the stocks.
The stocks will be pumped until several Research Analysts take interest in it. Once the news were spread out regarding these highly speculative stocks. The investors gradually dumps the stocks (with help of their brokers).
The things that you need to keep an eye for: - Low trading volume in the previous 3 - 6 months (relative to their peers) - Low P/E ratio with unremarkable earning growth - No positive catalyst or material news regarding the company - Stocks have high momentum (observe on weekly rather daily returns)
Pump-and-dump usually last between 3 months to 6 months.
Note: the answer below is speculative and not based on any first-hand knowledge of pump-and-dump schemes.
The explanation with spamming doesn't really makes sense for me. Often you see a stock jump 30% or more in a single day at a particular moment in time. Unlikely that random people read their emails at that time and decide to buy. What I think happens is the pumper does a somewhat risky thing: starts buying a lot of shares of a stock that has declined a lot and had low volumes during the previous days. As the price starts to increase other people start to notice the jump and join the buying spree (also don't forget that some probably use buy-stop orders which are triggered when the price reaches a particular level).
Also there should be some automatic trading involved (maybe HFT firms do pump-and-dumps) as you have to trade a big volume in a relatively short time span. I think it is unlikely to be done by human operators. Another explanation would be that there is a group of pumpers (to spread the risk so to speak).
As I think more of it, it is not necessary to buy "a lot of shares". You could buy some shares, sell them to another pumper and buy from them again at a higher price in several iterations. I think this could also work if you do it fast enough. These scheme makes sense only you previously bought many shares at the low price, possibly during several weeks. Once the price is pumped high enough you can start selling the shares you previously bought (in the days preceding the pump).