Pay off high-rate debt with a personal loan and save thousands. Learn more.

What is a “Pump-and-Dump” Scheme?

By Brian Nibley · May 03, 2021 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What is a “Pump-and-Dump” Scheme?

A pump-and-dump is the term used when an asset sees a sharp price increase (pump) followed by an even more dramatic price decrease (dump). Pump-and-dump schemes usually involve a group of investors who get into an asset early and then persuade many other investors to make purchases and drive up the price. Then, at some point, the original investors “dump” most or all of their holdings into the market, creating a crash. The investors who were not first in on the trade wind up taking substantial losses.

How Does a Pump-and-Dump Scheme Work?

Almost anyone can conspire to create a pump-and-dump. It could be a group of large investors, social media influencers, or a dishonest team behind a company or cryptocurrency project. Pump-and-dump schemes are made up of two phases.

The first phase focuses on spreading misinformation to boost an assets price beyond it’s real value, while the second phase shifts into a selling mode, where original investors shed their shares for high profits.

Pump-and-Dump Scam Phase One

In the first phase, a group of investors trying to get other investors to buy a security by spreading false or misleading information about it.

Imagine hearing, “Buy this stock and become a millionaire overnight, it’s going from $0.50 to $500 because of something that’s about to happen!”

Meanwhile, the investors spreading the misinformation already bought shares at a low price.

Pump-and-Dump Scam Phase Two

Once enough new investors have been convinced to buy the stock, the second phase of a pump-and-dump scam begins.

After waiting for the price to rise to unreasonable levels, the original investors begin selling shares. This causes the price to fall significantly, possibly inducing others to sell as well. The investors who got in late wind up taking heavy losses.

Is a Pump-and-Dump Scam Illegal?

Pump-and-dumps are illegal in the stock market. The U.S. Securities and Exchange Commission (SEC) often prosecutes people who initiate these types of stock scams.

The cryptocurrency market, however, often falls into a legal grey area. Because most cryptocurrencies are not classified as securities, regulators don’t always have the legal grounds to charge scammers in the first place.

However, there are some signs that this has begun to change, as cryptocurrency goes more mainstream.

In October 2020, John McAfee was charged with illegally promoting initial coin offerings (ICOs) in exchange for cryptocurrency payments. And some social media platforms have begun restricting influencers who promote particular cryptocurrencies.

How Can You Spot a Pump-and-Dump Scam?

There’s no hard and fast rule for figuring out if an asset is being used for a pump-and-dump scheme, which means investors have to use their own best judgment and do their own research when deciding to buy a stock.

The biggest indication of a pump-and-dump scheme might be the excessive hype built up around a project or company. When there seems to be an extraordinary amount of optimism around an investment for no good reason, or for reasons that don’t quite make sense, it could raise a red flag—and potential investors may want to investigate further.

Another indication of a pump-and-dump scam at play is the meteoric rise of stock prices in short periods of time in assets that were previously unknown, forgotten, or ignored.

Most often—absent some sort of stellar news or industry breakthrough—stocks of legitimate companies take time to come into their valuations. Although nothing goes up in a straight line they typically tend to rise steadily along the way.

When someone writes a marketing email or social media post using phrasing like “this company is the next huge thing,” and the price quickly rallies as if everyone believes this to be true, it could possibly be a pump-and-dump.

How Can You Avoid Pump-and-Dump Stocks?

The simplest and most assured way to avoid pump-and-dump stocks would be to stick to popular stocks and ETFs with very large market caps. The larger the market cap of a stock, the more capital would be required to initiate a pump and dump, decreasing the likelihood of such a thing happening.

According to , a site established by the U.S. Securities and Exchange Commission (SEC), micro cap companies are especially vulnerable to pump-and-dump scams because there’s often less information published about small, lesser-known companies. A smaller market cap also makes it easier for a group of investors to “pump” the price, as less capital would be needed.

Other ways to avoid falling victim to a pump-and-dump stock or crypto scam involve sticking to trusted sources of financial information. Learn to analyze a stock on your own, rather than relying on content hyping a particular investment, such as investment newsletters, marketing emails, and social media. Most reliable sources refrain from hyping any particular asset or security because they know it could get them into legal trouble.

Are All Penny Stocks Pump-and-Dump Stocks?

The umbrella term “penny stocks” is generally used to refer to micro cap stocks with a share price of less than $5. While pump-and-dump schemes are likely common among penny stocks, not all of them are pump and dump stocks. Many are legitimate companies that are new and still growing.

Generally, there are two places investors might be most likely to stumble upon a pump-and-dump asset:

•  Small cap stocks
•  Small, new cryptocurrencies

Are All Altcoins Pump-and-Dump?

Pump-and-dump schemes can be more common among smaller altcoins. Some have been targeted for this purpose in the past.

During the initial coin offering (ICO) boom of 2017 and 2018, countless pump-and-dump schemes took place in the altcoin markets. Some of them didn’t even have legitimate software projects behind them — they were created for the express purpose of hyping a coin so that the creators could sell at a high price.

Even today, many altcoins that have been around for years but have seen their prices collapse by 90% or more can fall victim to pump-and-dump schemes.

The Takeaway

In a pump-and-dump scam, one group of people conspire to pump up the price of an asset so they can dump it on unsuspecting investors. Anyone can start a pump-and-dump scheme, and anyone can fall victim to one. Typically, small cap stocks and newer, smaller altcoins are especially vulnerable to pump-and-dump scams, though any stock or crypto could fall victim to a scheme.

Want to put investing on autopilot? With SoFi Invest®, you don’t have to follow the market to master it. With automated investing, SoFi will build and manage a portfolio for you with no SoFi management fee. We’ll handle the goal setting, rebalancing, and diversifying—and you can monitor and manage your account from the convenient mobile app.

Find out how to get started with SoFi Invest.

SoFi Invest®
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA ( Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender