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A pump and dump scheme involves artificially inflating the price of a stock through false information, then selling the stock at the inflated price, resulting in significant losses for investors.
Illegal Practice
It is illegal and detrimental to market integrity, often targeting micro-cap and small-cap sectors.
Process
- Acquisition of Stocks: Fraudsters acquire a significant amount of stocks in a small or thinly traded company, often referred to as “penny stocks.”
- Aggressive Promotion: Stocks are aggressively promoted through various channels, including mass emails, newsletters, and social media posts with exaggerated claims.
- Price Inflation: Increased demand due to promotion drives up the stock price rapidly, creating an illusion of a lucrative investment opportunity.
- Sell-off: Once the price is sufficiently inflated, fraudsters sell off the stocks at the inflated prices, causing the price to plummet.
Regulatory Measures
Regulators like the Securities and Exchange Board of India (Sebi) have completely banned pump and dump schemes and are taking actions against individuals involved.
Sebi’s Crackdown
Sebi has taken actions against individuals, including celebrities, for their involvement in pump and dump schemes.
Regulation on Financial Influencers
Regulators are framing rules to govern financial influencers on social media platforms to prevent the spread of false information and protect investors.
Risks for Investors
Investors should be cautious of unsolicited investment offers and high-return promises. Blindly following celebrities and promoters can lead to significant financial losses.
Regulators’ Role
Regulators need to use social media surveillance mechanisms to stay ahead of scammers and protect investors’ interests.
Multiple Choice Questions (MCQs):
- What is a pump and dump scheme?
- A) Legal trading strategy
- B) Artificially inflating stock prices through false information
- C) Long-term investment plan
- D) Regulated financial practice
- What are the consequences of participating in a pump and dump scheme?
- A) Legal penalties
- B) Increased market integrity
- C) Guaranteed high returns
- D) Protection of investors’ interests
- What regulatory action has Sebi taken against pump and dump schemes?
- A) Issuing warnings
- B) Completely banning the practice
- C) Offering incentives for participants
- D) Ignoring the issue
- Why should investors be cautious of financial influencers on social media?
- A) They provide accurate information
- B) They are regulated by authorities
- C) They may spread false information
- D) They guarantee high returns
- What role do regulators play in protecting investors from pump and dump schemes?
- A) Ignoring the issue
- B) Using social media surveillance mechanisms
- C) Encouraging fraudulent activities
- D) Providing financial incentives to scammers