Purchasing a stock that's being pumped up by hype is going to give you a recipe for disaster...
Pump & Dump Concept
What does the Pump & Dump concept mean to you when it comes to your trades? More importantly, what does Pump & Dump mean?
It means that a group, entity, or person is pumping up the stock then selling it once the price is higher. They are looking to exit their position.
They try to pump the stock price up by sending newsletter lists, emailing people, posting to online message boards and chat rooms, or even posting on social media.
Years ago, I received these same messages claiming, "Stock XYZ is going to go up 1000%, because they are inventing a new amazing drug or company – it's only $1 per share now!" A lot of pump & dump happens when it comes to penny stocks or stocks that are trading for cheap per share.
These people have purchased a certain amount of stock and are now trying to pump that stock up – whatever means necessary...
They want to raise the price, so they can sell the shares to you.
Whatever Means Necessary
As previously stated, they'll pitch the stock to you using whatever means necessary.
Typically these methods are not illegal depending on the tactics used. They are only stating their opinion in saying, "Hey, this stock is great!"
The problem is that people who are not well-educated in the stock market buy into this hype...
Once this 'pumping' starts to happen, especially if it's a large-scale pump, the stock price can rise quite a few percentage points. At that point, people feel that the emails, newsletters, etc. were right.
However, in the long-term, the stock sells and drops much lower...
You must be very cautious and aware of what's happening; especially if you're receiving these stock tips from a stranger or someone uneducated in the stock market. Don't buy into the tips unless you understand the reasoning and logic behind the purchase.
Build a Relationship
It's important to build a relationship with the people recommending purchases of stock.
Understand why they are picking certain stocks, learn their strategies and systems, and then move forward if you wish.
Seeing these Pump & Dumps doesn't mean you can't trade them. Pumped up stocks are able to be traded.
If you receive recommendation to purchase a pumped stock, you can do your homework and research of the stock and recommendation and purchase accordingly.
I would approach this by creating my own trading plan for the stock and see where the trading levels are. If it's a massive pump, the stock could raise 10%-15% and I could trade it for a couple of days. However, I would need to keep in mind that the stock will likely sell off very quickly...
Always continue to raise your stops. Always take your profits into strength as the stock is climbing. Be mindful, be educated, and stick to your trading plan!