What is a pump and dump?
A pump and dump occurs when an investor or group of investors drive demand for a stock in a short period of time by creating false hype. The outcome is great for the investors who are pumping the stock, but horrible for the average investor who buys into the hype. This later results in a “dump” in share price, as the investors who pumped the stock up unload their shares into the new buyers.
What are the attributes of a pump and dump?
There is an excessive amount of hype and social media buzz.
Many investors take to Stocktwits, Facebook, Whatsapp and Twitter to discuss potential investment ideas. If there is an overwhelming amount of hype for a stock on social media, there’s a good chance that it is a pump and dump.
Its press releases do not include numbers.
Pump and dumps are not only defined by investors, but also by management. If management consistently releases news that has a lot of hype but lacks actual numbers, then there’s a good chance that they are hiding something. For example: A press release reading, “Company XYZ announces a huge contract with a major technology company!” does not tell you anything about how much value is added. What’s the size of the contract? Over what time period? What is the other company? All of these questions arise due to a lack of transparency.
The stock has a history of paid promotion.
Most stocks that are pumped and dumped have a history of being promoted. Not only is it not the first time that the stock may have been pumped, but it could be the one hundredth time! Be sure to check the theotc.today website to see if the stock you intend to buy is being or has been promoted in the past.
What promoters/investors are saying about the stock does not match up with its SEC filings.
SEC filings are the only way that you can get facts about a company’s financials. Anything that you read online or hear from a friend has to be verified through filings, or else it cannot justify buying a stock.
Words and phrases to draw excitement from investors are used without any quantitative data to back them up.
Not only is the hype surrounding pump and dumps overwhelming, but it’s also filled with exciting words and phrases. One of the more common phrases on social media is, “huge news is coming!” Unless the individual has spoken with management and has written confirmation of an upcoming news release, it’s just speculation. News anticipation and exciting phrases usually go hand in hand, so avoid them at all costs.