Key takeaways

• Pump and dump scams artificially inflate a share price before scammers sell, often leaving other investors with losses.

• These schemes are commonly promoted through social media, messaging apps and online forums using urgency and exaggerated claims.

• Unsolicited tips, “guaranteed” outcomes, and pressure to act quickly are common warning signs.

• Taking time to verify information and relying on official sources can help reduce the risk of being caught out.

  
  

Investment scams are becoming increasingly sophisticated – and unfortunately, more Australians are being caught out by schemes that appear convincing, timely, and credible.

One type of scam that has seen a recent rise is the “pump and dump” scheme. These scams often spread through social media, messaging apps, or online forums, and can result in investors buying shares based on misleading or false information, only to see the price fall sharply soon after.

This article explains what pump and dump scams are, how they typically operate, and practical steps investors can take to protect themselves.

What is a pump and dump scam?

A pump and dump scam is a form of market manipulation where scammers artificially inflate the price of a stock (the “pump”) before selling their own holdings at the higher price (the “dump”). Once they exit, the share price often collapses, leaving other investors with losses.

These schemes usually target small-cap or illiquid stocks, where prices can be moved more easily through coordinated buying and hype.

How pump and dump schemes usually work

While the details can vary, many pump and dump scams follow a similar pattern:

1. The promotion phase (“the pump”)
Scammers promote a particular stock using bold claims such as:

• “This stock is about to explode”

• “Guaranteed takeover target”

• “Inside tip before a major announcement”

These messages are often shared via:

• WhatsApp or Telegram groups

• Facebook or Discord communities

• Direct messages from unknown individuals

• Online comment sections or forums

The promotion may include fabricated “research,” false credentials, or claims that the opportunity is time-sensitive.

2. Rapid price movement
As more people buy into the hype, trading volume increases and the share price rises, reinforcing the illusion that the tip was legitimate.

3. The sell-off (“the dump”)
Once the price has risen sufficiently, the scammers sell their shares. Without genuine demand, the price can fall quickly and sharply.

4. The aftermath
By the time many investors realise what has happened, the price has already dropped. The promoters often disappear, delete messages, or move on to the next scheme.

Common warning signs to watch for

Pump and dump scams often rely on urgency and emotion. Some red flags include:

• Unsolicited tips from people you don’t know

• Claims of “guaranteed” outcomes or low risk

• Pressure to act quickly or “before the market opens”

• Heavy promotion of a single stock across multiple platforms

• Vague or unverifiable information about the company

• Promoters discouraging independent research

If something feels rushed, secretive, or too good to be true, it’s worth pausing.

Why these scams can be convincing

Scammers are increasingly skilled at mimicking legitimate investing language. They may:

• Reference real market events or trending themes

• Share selectively positive data while ignoring risks

• Present themselves as experienced traders or insiders

• Create the appearance of a large, engaged community

Importantly, price movements alone do not validate a claim. A rising share price can be part of the manipulation itself.

How investors can protect themselves

While no approach removes risk entirely, these steps can help reduce exposure to scams:

Take time before acting
Scammers rely on speed. Taking time to research a company, read announcements, and understand its fundamentals can help cut through hype.

Verify information independently
Rely on official company announcements, reputable financial news sources, and primary disclosures – not screenshots, forwarded messages, or anonymous tips.

Be cautious with social media tips
Online forums and messaging apps can be useful for discussion, but they are also common channels for misinformation.

Diversification matters
Concentrating investments in a single stock based on a tip increases exposure to manipulation and volatility.

Report suspicious activity
If you encounter content that appears misleading or manipulative, consider reporting it to the relevant platform or regulator. 

If you think you’ve been affected

If you believe you may have acted on misleading information, it can be helpful to:

• Document what you received and when

• Review official company disclosures

• Seek independent guidance from trusted, licensed professionals

• Stay alert for follow-up scams targeting people who have already been affected

For more information, please refer to Moneysmart's Report an investment scam page. 

Staying informed is one of the strongest defences

Markets involve risk, and not all losses are the result of scams. However, understanding how schemes like pump and dump scams operate can help investors recognise warning signs earlier and make more informed decisions.

At Selfwealth, we believe investor education plays an important role in helping people navigate markets with greater awareness.