Pump and dump

The financial fraud known as pump and dump involves artificially inflating the price of a stock or other security through promotion, in order to sell at the inflated price. This practice is illegal under securities law -- yet it is particularly common on the Internet.

Here's how it works: A company's web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest "hot" stock. Messages in chat rooms and bulletin board postings -- or, more often, spam -- may urge readers to buy the stock quickly.

Unwitting investors purchase the stock in droves, creating high demand and pumping up the price. But when the persons behind the scheme sell their shares at the peak and stop promoting the stock, the price plummets, and investors lose their money.

Fraudsters frequently use this ploy with small, thinly traded companies -- penny stocks -- because it's easier to manipulate a stock when there's little or no information available about the company. [1]

Elements of this page are taken from publications of the United States Securities and Exchange Commission and are not subject to copyright.

A good example of how this works can be seen in the movie The Boiler Room