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 operate

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 company

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 value. 

What type of shares and companies are involved?

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 companies. 

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.

pump and dump diagram illustrating shares bought at 10c and dumped at 90c

How to avoid scams that inflate the share price

  1. Ignore share information from people you do not know and trust
  2. Research any company carefully before you invest in their shares and ensure you get information from truly independent sources
  3. Check that the person contacting you about the shares is a licensed stock broker and their company is on ASIC Connect's Professional Registers.
  4. 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 scammed

  1. Stop investing any more money
  2. Check our list of companies you should not deal with to see if the company is on the list
  3. Check the company licence number on ASIC Connect's Professional Registers.
  4. 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

Related links

Last updated: 29 Jan 2016