Pumping and dumping is the illegal act where someone buys shares in a company, hypes it to pump up the share price so that she profits, and then dumps her shares quickly, before they fall in value. Since this practice is usually done with small and volatile stocks, the pump-and-dumper's selling will likely contribute to the stock's rapid downfall.
This practice has flourished on the Internet, where unscrupulous folks have found it easy to pump up the stock prices of penny stocks. The SEC and others have gone after many pump-and-dumpers, so don't think of this as a new career possibility for yourself. (One famous case involved a 15-year-old.)
Our advice: Steer clear of penny stocks (those trading under $5 per share) and be wary of any hype that you might run across about small obscure companies you've never heard of.
Learn more about this fascinating phenomenon in these Fool articles:
- Stephen Simpson: More Manipulation and the Individual Investor
- Rick Aristotle Munarriz: Penny Stock Nation
- Jay Perlman: Securities Fraud, Penny Stock Fraud
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