Pump and dump schemes promise high-returns for a seemingly low-risk investment. They observed when a stock with normally low trading volume has a sudden price increase.
Pump and dump schemes often start with an investor receiving an promotional email or telephone call touting (“pumping”) an incredible opportunity to buy this newly discovered or overlooked low-priced gem. They may claim to have insider information. The scammer, or cartel of scammers, tell you this stock has incredible potential and you are given this rare chance to get in on the ground floor. What is not revealed is that the promoters already owns a large quantity of this stock which they bought at a very low price. They buy and sell the stock among themselves to give the impression that there is an avalanche of demand for this stock. As the stock is promoted, more and more investors buy shares. The value of the stock is shooting up and you do not want to miss out (FOMO). Once the share price hits a price the promoters think is the maximum it will achieve, they sell (“dump”) their own shares and the value of the stock plummets, leaving investors with worthless stock and big losses.
To avoid this type Ponzi scheme, look for stocks that have shown long term performance and good financial statements. Don’t buy stocks where there is insufficient reliable information available. Rumors are not a good source of investment advice. Be wary of stocks that have a low trading volume. They are easy to manipulate and often difficult to sell.