Pump and Dump stock schemes are as old as time itself. More recently pump and dump came into the public view again in the “Jaffer Affair“.
The scam works by taking a penny stock that has lots of stock in the market float but little demand. Or it might be an initial public offering where the promoters and investment bankers have received free shares they want to unload on the unsuspecting public.
The market maker – broker, investment banker or investment dealer – promotes the stock by buying and selling it on the same day. A market maker “makes” the market by supporting an otherwise weak stock. You don’t need to make a market for Apple since it’s in demand. A penny stock can disappear off the stock exchange without a market maker.
Behind the scenes, people who hold the stock try to generate buzz or public interest in the stock. When the public pick up on the stock’s rise in price – which is almost totally based on a press release or rumor – they dump their holdings.
Greed and fear are said to drive the stock market. People are easily conned by the “insider tip” that supposedly alerts them to an undervalued stock. The attempt to beat the market isn’t just for rubes. Large investment houses work the same angle.
Pump and dump schemes are sometimes run by organized crime but generally are the work of unethical investment types.
The positive market spin used to be created by mass mailing campaigns. Today the Internet is a much more effective way to spread rumors that will pump up a stock’s price.
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