What is Pump and Dump Scheme:?

Why in news ? The Securities Exchange Board of India’s (SEBI) recently slapped a fine of Rs 7.75 crore on 11 individuals for allegedly operating a ‘pump and dump’ scheme.

About Pump & Dump Scheme?

• A pump and dump scheme is a type of securities fraud that involves artificially inflating the price of a stock through false or misleading information. Perpetrators aim to sell their shares at this inflated price before the price crashes back down to reality.
• The Pump: Fraudsters acquire a large stake in a stock, usually a microcap or small-cap company with low trading volume and limited public information.  They then use various methods to create a buying frenzy, such as:
• Spreading false or misleading information about the company’s prospects through social media, online forums, or even fake press releases.
• Hyping the stock on investment websites or chat rooms.
• Creating a sense of urgency or scarcity to encourage investors to buy quickly.

The Dump: Once the stock price has been artificially inflated due to the increased buying activity, the fraudsters quickly sell their shares at a significant profit. This selling pressure causes the price to plummet, leaving unsuspecting investors who bought at the inflated price with substantial losses.

Why are pump and dump schemes attractive to fraudsters?

Low risk of detection: They often target small companies with limited public scrutiny.

Potential for high profits: By manipulating the stock price, they can generate significant returns.

Why are pump and dump schemes harmful to investors?

Financial losses: Investors who buy at the inflated price can lose a significant amount of money when the price crashes.

Eroded trust in the market: These schemes undermine investor confidence and make it difficult to distinguish legitimate investment opportunities.