Pump and dump schemes inflate a penny stock's price with hype, then dump the position into retail buyers. Learn the mechanics and red flags.
A pump and dump is a coordinated scheme where promoters drive up a stock's price using exaggerated or false promotional claims, then sell their positions into the buying frenzy they created. Penny stocks are the typical target because thin liquidity makes price manipulation easier and small floats mean less buying is needed to spike the price.
The cycle: promoters buy in cheap → release promotional materials (emails, social media, paid ads, newsletter promotions) → retail buys in → promoters sell at the top → stock crashes. Most pumps end with the stock back below the starting price within weeks. Stock promotion itself is legal if compensation is properly disclosed; hiding compensation is securities fraud under Section 17(b) of the Securities Act.