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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?

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    Interesting. I am also curious how often pump and dump occurs, or if it is mostly a movie plot.
    – MrChrister
    Dec 18, 2012 at 23:33
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    @MrChrister I'm under the impression it happens a fair amount with penny stocks, but I don't have any real stats to back that up.
    – C. Ross
    Dec 19, 2012 at 1:40
  • @MrChrister: I used to get a lot of spam that was obviously part of a pump-and-dump scheme. I don't know if they have quit sending it or the filters have gotten good enough that it's not getting through anymore.
    – Loren Pechtel
    Dec 19, 2012 at 21:09
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    The big one is that someone is contacting you about it. People don't announce actual good opportunities, they keep them close to the vest.
    – zeta-band
    Jun 14, 2017 at 18:05
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    These guys did (identify which stocks were being used for pump&dump): youtube.com/watch?v=ytDamqTjPwg
    – Ben Voigt
    Sep 4, 2018 at 2:29

3 Answers 3

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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.
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    Am I right in assuming that by the time the spam emails start arriving it is too late to be on the winning side of a pump and dump?
    – OpenCoderX
    Dec 19, 2012 at 1:59
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    @opensourcechris - Yes. But even if you were the first, the risk is so high that I (and I think most) would advise against it. You'd have to buy and sell on time, and you would be missing important information, which is when the spam goes out. Capitalism works on transparency, scams and rip-offs do not.
    – MrChrister
    Dec 19, 2012 at 2:40
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    May I add that you should never invest in companies whose business model you don't understand? Each era has it's own buzzwords. Nano, quantum, graphene, internet, information superhighway. If you can't figure out what it is they actually do and why anyone would want to pay for that, stay away.
    – Lagerbaer
    Jun 12, 2013 at 3:51
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    @Lagerbaer - I understand the sentiment, but we are centuries beyond the point at which a single human could know the sum total of human scientific knowledge. Sometimes even multi-billion-dollar blue chips don't understand the whys and hows of their own NBT. Big Pharma's an example. The sentiment, though, is valid; do your own research into the company, what it's actually doing, how it plans to market it, etc.
    – KeithS
    Jun 12, 2013 at 16:54
  • "Pump-and-dumps almost always involve unsolicited e-mail" If you've not seen spam yourself (as others indicate, spam filters may be getting better), search online for others reporting such emails.
    – TripeHound
    Sep 4, 2018 at 8:23
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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.

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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).

Update:

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).

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    Short fast price quote climbs can just be an indicator of poor liquidity which is common in thinly traded OTC securities. If you've ever seen the depth chart of a thinly traded security, it might only be a small number of shares before a big change in ask price meaning it wouldn't take much to materially move the quoted price of a security. The reason pump-n-dumpers need something like an email spam list is to have a population of people to sell in to.
    – quid
    Jun 13, 2017 at 23:30
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    You can't make money buying and selling from yourself.... Sudden price jumps can occur if even a very small number of shares is transacted on a thinly traded, illiquid security. There might be 7 shares in an order book with an ask at $10 and the next ask might not be until $12. So just $82 can cause a 20% quoted price jump. Retail investors just can't generally see the order book to see what's beyond the lowest ask. Things like this are realllllllllly common in thinly traded securities. You need other buyers to dump to, that's where spam comes in.
    – quid
    Jun 14, 2017 at 7:54
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    buying and selling from your co-conspirator would be functionally the same as buying and selling from yourself. You cannot dump unless there is someone on the other side of the transaction to dump to. If that other person is your co-conspirator you don't profit making the scheme worthless.
    – quid
    Jun 14, 2017 at 16:32
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    Who are you going to sell the shares to? Your co-conspirators? Where do the new buyers come from? I didn't miss any part of your answer.
    – quid
    Jun 14, 2017 at 17:33
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    HFT makes money on interexchange arbitrage and trade front running, not pump and dump because that's not even a high frequency endeavor. P&D schemes need some kind of communication network to entice interest in to a POS OTC company to add volume. You don't need to trade a big volume to have big price swings on POS OTC low liquidity stocks. Your answer is littered with "I think" but your assumptions about price movement, speed and volume are all wrong. The only thing you got right is the D&P perpetrators will buy their shares before communicating to others to buy. Good luck to you.
    – quid
    Jun 14, 2017 at 17:57

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