Pump and dump is a type of market manipulation in which the price of a financial asset is artificially increased through misleading or exaggerated information. After the price rises, the people who promoted the asset sell their holdings at the higher price, leaving other investors with losses.
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Pump and dump schemes rely on attracting many buyers through hype.
The manipulation usually starts when a group of traders buys a large amount of a low value or thinly traded asset. They then promote the asset aggressively through social media, online forums, or false news to create excitement and attract new investors. As more people start buying, the price increases rapidly. Once the price has been pushed high enough, the original promoters sell their positions. After the selling begins, the price often collapses because the demand disappears.
Short example:
Suppose a group of traders buys a large amount of shares in a small company trading at $1.
They start posting messages online claiming the company will soon announce a major breakthrough.
Many investors believe the rumors and rush to buy the stock, pushing the price up to $4. The original traders then sell their shares at the higher price. Once the hype fades and buyers disappear, the stock price falls back toward its original level, leaving many investors with losses.
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