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Pump and dump

Pump and dump is slang for an illegal stock manipulation scheme in which a shareholder encourages others to buy his/her stock. Then when the price goes up due to the increased demand, the person sells it.

Expanded Definition

Pump and dump schemes are relatively simple stock manipulation schemes that occur most commonly in penny stocks. The "pumper" usually acquires stock in a thinly traded , thinly followed publicly traded company either at market price or sometimes at sub-market prices through private equity placements. Then the "pumper" either produces or hires someone to produce misleadingly overly optimistic advertising material hyping the stock. The typical form these ads take are usually fax blasts, paid mailers,message board posts or spam stock touts. Once enough people fooled by the unsolicited ads buy the stock (sometimes dramatically pushing the stock price up due to low floats of thinly traded penny stocks) the "pumper" proceeds to "dump" his/her shares often rapidly depressing the stock price to below the price where the pumper initially purchased the stock. (consulted [1] and [2]).

According to Academic research done by Laura Frieder and Jonathan Zittrain (see abstract here http://papers.ssrn.com/sol3/papers.cfm?abstract-id=920553 ) the typical victims of these schemes are unsophisticated investors who have relatively small amounts of investable capital.

The short and distort stock manipulation scheme is a less common inverse variant of the Pump and Dump scheme where the scammer tries to deflate the stock's price through negative unsolicited ad material as opposed to trying to inflate it as the scammer does in the Pump an Dump scheme.

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