Inflating the share price
Pump and dump scams
Pump and dump scams work by artificially inflating the price of
shares. The scammers usually own large parcels of shares in small
publicly listed companies. They try to drive up the price of the
shares by giving false positive or overly optimistic statements
about a company's activities or capacity.
Here are more details on how a pump and dump scam works and how
you can protect yourself from being caught up in one.
Where pump and dump scams
You can come across pump and dump scams:
- On websites, internet forums and blogs -
'realistic' and 'professional' web operators claim to give 'share
tips', 'investment opportunities' or 'inside knowledge'
- By phone - overseas call centres call
potential investors to encourage investment in a small company and
pump up the share price or leave a message for you that appears to
be an insider tip for somebody else, left by mistake
- By text message - if you receive a text
from a number you don't recognise with a 'hot share tip'
- In person - scammers might have an office, run
seminars, hand out flyers, and even offer to visit you to try to
persuade you to buy the shares and they may be unrelated to the
How pump and dump scams work
Scammers buy shares in a small company at a low price. Then they
send out false tips about the company having great prospects. As
more people invest, the share price goes up and the scammers sell
their shares at the peak of the price rise. Then the share price
falls and the shareholders are left holding them at the reduced
What type of shares and companies
Pump and dump scams often take advantage of shares in small
companies that are of extremely low value. This means a small
volume of trading can have a large impact on the share price. These
scams often involve companies that are likely to have unexpected
price spikes anyway, for example emerging mining
Shares bought at 10c and dumped at 90c
The illustration below outlines the pump and dump process of a
share that is bought at 10 cents, pumped up, then dumped by the
scammers at 90 cents.
How to avoid scams that inflate
the share price
- Ignore share information from people you do not know and
- Research any company carefully before you invest in their
shares and ensure you get information from truly independent
- Check that the person contacting you about the shares is a
licensed stock broker and their company is on ASIC Connect's Professional Registers.
- Ask yourself this question: if someone really had information
on a company that was going to have a spectacular price rise, why
would they share this information with others?
What to do if you have been
- Stop investing any more money
- Check our list of companies you should not
deal with to see if the company is on the list
- Check the company licence number on ASIC Connect's Professional Registers.
- Report the
scam to ASIC
Pump and dump scams are illegal. The operators of the scams can
be charged with misleading investors with false rumours relating to
stock exchange listed companies. If found guilty, the operators of
pump and dump scams can be jailed and fined heavily.
Always do your own research on shares before you
buy and consider seeking professional financial advice.
Last updated: 29 Jan 2016