Pump and dump Definition
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. While fraudsters in the past relied on cold calls, the emergence of the Internet offered a cheaper and easier way of reaching large numbers of potential investors.
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 -- known as "penny stocks," and generally traded on the over-the-counter bulletin boards, rather than on the larger exchanges like the NYSE or Nasdaq -- because it's easier to manipulate a stock when there's little or no information available about the company.