The stock market is a potential place for many frauds, such as market manipulation through fake buy-sell orders, insider trading. And in addition, it is impossible not to mention the behavior of making stock prices. This is a scam that has been around for a long time, but is still used today, leaving many victims trapped. So what is a pump-and-dump trap, and how to avoid it?
What is pump-and-dump?
In a nutshell, pump-and-dump (aka price manipulation) is the inflating of a stock's price far beyond its true value, enticing many investors to buy. At some point, game organizers will sell most or all of their shares for a profit. Later, when investors found out, it was too late, because the stock price had dropped significantly. The latter buyers are the ones who suffer the most.
How does pump-and-dump work?
Step 1: Choose stocks to "blow off the price"
The stocks that are often chosen to be included in this game are small-cap stocks. They are characterized by very cheap prices, and very sparse transaction volumes. These stocks are also often not included in a major stock market index, or not yet officially listed. The organizers of these games, or "insiders," will start buying to stock up, pushing up the stock price slowly.
Step 2: Spread the good news
Once the target stock has been selected, the "insider team" will begin to release good news about the stock. The purpose is to "lure" investors to rush to buy, pushing the stock price up. Initially, it was word of mouth, the kind that only siblings could get this information. Then there are forums, websites, chat groups, and even mainstream media. Good news comes from not just one person or one source. On the contrary, they have a purpose, and come from many different locations to create objectivity and trust.
Step 3: Discharge
When a stock is hyped to a high, many investors rush to buy it, it is also the time to prepare to put it away. The "insider team", and their team members will all sell out, causing the stock price to plummet. The history of the US stock market has illustrative examples with Jonathan Lebed. This is a young stock trader, using a simple pump-and-dump trick but making illegal profits of up to $ 800,000 since he was a high school student. Accordingly, Jonathan wrote many and often for websites, stock selection guides when he was 13 years old. Jonathan then used various accounts to inflate the prices of penny stocks that he had bought in large quantities before. However, it was eventually discovered and sanctioned by the US Securities and Exchange Commission (SEC). Today, pump-and-dump tactics are widely used and popularized through stock forums, chat groups like Telegram or other social networking platforms.
How to recognize and avoid pump-and-dump?
1. Be wary of information so as not to get FOMO (Fear Of Missing Out)
Pay attention, because when stocks are word of mouth, or are being "called for" a lot on forums, chat groups, stock websites, it is likely that games are being created. If this stock has a low par value, a small capitalization (penny stock), and a history of very little and sparse trading volume, the possibility of a pump-and-dump is higher. The news to hype the stock up is usually good news about future revenue or profit. It may be a merger with a large corporation, or will receive large investment capital, or have a new market, have a new product with the ability to generate outstanding profits.
2. Do due diligence
For experienced investors, investing in growth stocks, especially penny stocks, is also a popular strategy. But to avoid falling into the pump-and-dump trap, they spend a lot of time verifying information, aka due diligence. For example, it is possible to ask whether these companies already have a large shareholder, which is an investment fund? And if so, what is the reputation and size of that investment fund? Are future sales or profit statements verifiable? Or maybe there is an opportunity, but is the potential growth so high that it is being hype today? Vietnam's stock market is still in the developing stage, many regulations and sanctions are lacking and weak, so pump-and-dump traps are still widely used. Especially when the market enters the bull phase, many new investors are eager to join. There have been many stocks in Vietnam that have increased by 100-200% in a short time, and then plummeted without stopping, losing 90-95% of their value at the peak. And in these cases, the investors who bought before the drop are the ones who suffer the most.
CONCLUSION
Like many other stock markets in the world, in Vietnam, the community of individual investors, new and young investors is increasing. Information about stock options is therefore also abundant on forums, chat groups, or social networks. As a new investor, be careful with FOMO psychology, need to receive information and have careful verification. When inexperienced, young investors should know how to temporarily stand on the shoulders of other giants, curb greed, understand and apply risk management methods in investment. Because in long-term investment, preserving capital and accumulating in the early stages is the key factor to determine results.
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