Share Market News / What is the pump and dump scam, due to which crores of rupees are made in the stock market

As investing in the stock market has become easier, frauds have also increased. Recently, cases like Jane Street shocked everyone. In the pump and dump scam, big investors sell shares by increasing their price, due to which small investors have to suffer huge losses.

Share Market News: As investing in the stock market has become easier, scams are also increasing through it. Every day the Securities and Exchange Board of India (SEBI) keeps cracking down on big companies. Recently, the case of America's well-known global algo trading company Jane Street was in the headlines, which defrauded investors of thousands of crores of rupees under the guise of futures and options. Similarly, through another dangerous scam in the stock market 'pump and dump' scheme, big investors grab the hard-earned money of retail investors. Let us understand this pump and dump scam in detail and know how to avoid it.

What is a pump and dump scam?

Pump and dump is a type of financial fraud that has been going on in the stock market for a long time. In this scam, scammers target a particular stock, especially penny stocks or low-priced stocks. They first buy these shares in large quantities, then promote them loudly through social media and other platforms. Due to the hype, retail investors start investing in these stocks, causing the stock price to rise rapidly. As soon as the price reaches its peak, scammers make profits by selling their shares. After this, the stock price suddenly crashes, and small investors have to suffer huge losses.

How does a pump and dump scam work?

The process of a pump and dump scam can be understood in the following steps:

Selection of penny stocks: Scammers choose low-priced stocks, such as Rs 2 or Rs 5 shares. These stocks are often small or of companies with weak financial position, whose price is easy to manipulate.

Large volume purchases: Scammers buy these stocks in millions. Since these stocks are cheap, large volume purchases are possible with less capital.

Promotion and hype: Scammers then start promoting these stocks through social media platforms (such as Instagram, Facebook, Telegram, or WhatsApp groups). They make false claims, such as "this company will soon make huge profits" or "this stock can give 10 times returns". This attracts unsuspecting retail investors.

Price surge: As retail investors start investing in these stocks, the demand for the stock increases and the price goes up rapidly. For example, a Rs 2 stock can reach Rs 10.

Scammers' exit: When the stock price reaches its peak, scammers sell all their shares and make huge profits.

Price crash: After the scammers sell the shares, the demand dies down, and the stock price falls rapidly to its original price or even below. This causes huge losses to retail investors.

An example: Suppose, a company's share is Rs 2. Scammers buy millions of shares of this company. They then promote this stock on social media as "the next multibagger". Retail investors, who are hoping for quick profits, start buying this stock. This increases the share price from Rs 2 to Rs 10. During this time, scammers make huge profits by selling their shares. As soon as they sell the shares, the share price falls back to Rs 2 or even below. The result? The hard-earned money of retail investors is lost.

Ways to avoid pump and dump scam

Check the company: Before investing in any stock, check the fundamentals of the company, such as its business model, financial position, and credibility of management.
Beware of social media promotion: If a stock is suddenly very much discussed on social media, check its veracity. Do not trust unknown tips.
Stay away from penny stocks: Investing in penny stocks can be risky. There is a high possibility of manipulation in them.
Follow SEBI guidelines: Read the warnings and advice given from time to time on SEBI's official website.
Contact a financial advisor: If you are new to the stock market, take the help of a certified financial advisor.

Role of SEBI

SEBI keeps taking strict steps to prevent such scams. In cases like Jane Street, SEBI took action and took many steps to make investors aware. Still, it is important for investors to remain vigilant themselves, as scammers keep adopting new methods.