Someone online is very excited about a stock. They have done "deep research." The company is about to announce something big. The price is going to explode. You need to get in now, before everyone else finds out.
This narrative has played out countless times. Occasionally, the excitement is genuine and the company delivers. Far more often, the person sharing the tip is not trying to help you. They are trying to use you.
This article explains how pump-and-dump schemes work, why hot tips are structurally unreliable, and what behaviours protect against manipulation.
This is general educational information, not personal financial advice.
What a Pump-and-Dump Is#
A pump-and-dump is a form of market manipulation. The scheme has two phases:
Pump: The manipulator accumulates shares in a thinly traded security, then promotes it aggressively to create buying interest. The promotion can take many forms: social media posts, forum discussions, group chats, newsletters, or direct messages. The goal is to generate demand that pushes the price up.
Dump: Once the price has risen and enough new buyers have entered, the manipulator sells their holdings into the elevated demand. The price collapses. Late buyers are left holding shares worth far less than they paid.
The manipulator profits from the price difference between their accumulation cost and their selling price. Everyone who bought during the promotion phase typically loses.
This is illegal in Australia under the Corporations Act 2001, which prohibits market manipulation and misleading conduct.¹ But enforcement is difficult when promoters operate anonymously online or from jurisdictions beyond Australian regulators' reach.
Why Thin Liquidity Makes Manipulation Easier#
Pump-and-dumps almost always target small, illiquid securities. There are structural reasons for this.
Small order books. A thinly traded stock might have only a few thousand dollars of shares available at any price level. A relatively small amount of buying can push the price up significantly.
Low information environments. Large companies have analyst coverage, media attention, and regulatory scrutiny. Small companies often operate in information vacuums, making it easier to construct narratives without contradiction.
Retail-dominated trading. Institutional investors rarely participate in micro-cap speculation. The buyer pool consists largely of individuals, who are more susceptible to promotional tactics.
A manipulator with $50,000 cannot meaningfully move the price of a major bank stock. They can move the price of a company trading $20,000 per day.
The size of the target is the first warning sign. Stocks that can be easily promoted are stocks that can be easily manipulated.
The Anatomy of a Hot Tip#
Hot tips do not arrive with disclaimers. They arrive with urgency, exclusivity, and confidence.
Common Elements#
Urgency. "The announcement is next week." "This is about to run." "You need to get in before the close." Urgency prevents due diligence. It exploits the fear of missing out.
Exclusivity. "I'm only sharing this with a few people." "This isn't public yet." "You're getting this before the crowd." Exclusivity creates a sense of privilege and obligation.
Certainty. "This is guaranteed." "I've seen the numbers." "There's no way this fails." Certainty is impossible in markets. Anyone expressing it is either lying or deluded.
Vague sourcing. "A friend in the industry told me." "I have insider connections." "Trust me on this one." Claims that cannot be verified cannot be evaluated.
Dismissal of risk. "The downside is minimal." "You can't lose." "This is a sure thing." Every investment has risk. Denying this is a manipulation tactic.
The Information Asymmetry Problem#
If someone truly had material non-public information about a company, sharing it would be illegal. Acting on it would be insider trading. The person sharing a "hot tip" is either:
- Lying about having special information
- Breaking the law by sharing it
- Genuinely mistaken about its significance
None of these scenarios makes the tip reliable.
Even if the information is accurate, the sharer has an incentive you do not see. They may already own shares and need buyers to exit into. They may be paid to promote. They may simply enjoy the status that comes from appearing to be in the know.
The question is not whether the tip might be true. It is whether you have any reason to trust the source, and what they gain from your participation.
Social Proof as a Manipulation Tool#
Humans are social creatures. When many people appear to believe something, the belief becomes more credible. Manipulators exploit this.
Coordinated posting. Multiple accounts post similar content about the same stock within a short period. This creates the appearance of organic interest. In reality, the accounts may be controlled by the same person or group.
Engagement farming. Posts are designed to generate likes, shares, and comments. High engagement signals popularity, which attracts more viewers. The quality of the underlying claim is irrelevant.
Testimonials. Screenshots of gains, stories of profits, claims of success. These create envy and urgency. They are easily fabricated and selectively shared. Losses are never posted.
Group dynamics. In chat groups or forums, early members may be plants or true believers whose enthusiasm influences newcomers. Disagreement is discouraged or punished. The group becomes an echo chamber.
Social proof works because it is usually valid. In most contexts, if many people believe something, it is worth considering. Manipulators weaponise this heuristic.
The Aftermath#
When a pump-and-dump completes, the damage is not evenly distributed.
Early buyers (the manipulators): They exit with profits, often substantial relative to the capital deployed.
Mid-phase buyers: Some may sell in time to break even or make small profits. Many hold too long, hoping for more gains.
Late buyers: They buy near the peak, just as the manipulators are exiting. When the price collapses, they face a choice: sell at a significant loss or hold shares that may never recover.
The manipulators need late buyers. The entire scheme depends on new money entering at elevated prices. Every promotion, every post, every "hot tip" is designed to create late buyers.
Pause and Verify Behaviours#
The defence against manipulation is process, not intelligence. Smart people fall for scams. People with robust verification habits do not.
Before Acting on Any Tip#
Pause. Do not act immediately. Urgency is a manipulation tactic. Legitimate opportunities do not disappear in hours.
Identify the source. Who is sharing this? What is their track record? What do they gain if you buy?
Verify independently. Search for the company on the ASX website. Read the announcements. Check the financials. Look for analyst coverage or news from reputable sources.
Check the liquidity. How much does the stock trade daily? Is the order book deep or thin? Low liquidity is a warning sign.
Ask who is selling. If the price is rising, someone is selling into that demand. Who? Why would they sell if the opportunity is so certain?
Consult the registers. Check ASIC's registers for any warnings, actions, or alerts related to the company or its promoters.²
If Something Feels Wrong#
Trust the discomfort. The feeling that something is not quite right is often correct. Manipulators are skilled at creating narratives, but they cannot fully suppress pattern recognition.
Do not engage. Do not buy. Do not share. Do not argue with promoters. Engagement of any kind serves their purposes.
Report if appropriate. ASIC accepts reports of suspected market manipulation through its online reporting portal.³
Why Hot Tips Are Structurally Unreliable#
Even setting aside deliberate manipulation, hot tips are poor investment inputs for structural reasons.
Selection bias. You hear about the tips that appeared to work. You do not hear about the hundreds that failed. The survivor creates the story.
Timing mismatch. By the time a tip reaches you, it has passed through multiple hands. Each hand has the opportunity to act first. You are not early; you are late.
No accountability. The person sharing the tip bears no cost if it fails. They are not liable. They face no consequence. Advice without accountability is cheap.
Impossible verification. You cannot assess the research, check the assumptions, or evaluate the reasoning. You are asked to trust without evidence.
Misaligned incentives. If the tip is good, why share it? Sharing reduces the opportunity by adding buyers. The act of sharing suggests either that the sharer does not believe it, or that they need you to believe it for their own exit.
Summary#
Pump-and-dump schemes manipulate prices by promoting thinly traded securities to create artificial demand, then selling into that demand at inflated prices. Hot tips exploit urgency, exclusivity, certainty, and social proof to bypass critical thinking. Thin liquidity makes manipulation easier because small amounts of capital can move prices significantly. The defence is process: pause before acting, identify the source and their incentives, verify claims independently, check liquidity and trading patterns, and report suspected manipulation. Hot tips are structurally unreliable even without fraud, because of selection bias, timing mismatch, lack of accountability, impossible verification, and misaligned incentives. If someone needs you to buy something, ask why.
Sources#
- Australian Securities and Investments Commission. (2024). Market manipulation. https://asic.gov.au/about-asic/asic-investigations-and-enforcement/market-manipulation/
- ASIC. (2024). ASIC Connect Professional Registers. https://asic.gov.au/online-services/search-asics-registers/
- ASIC. (2024). Report misconduct to ASIC. https://asic.gov.au/about-asic/contact-us/how-to-complain/report-misconduct-to-asic/