Some of the most common scams in the Indian stock market are often executed by individuals or small groups, making them even harder to detect. Let’s find out about them.
As the famous saying goes, ‘If it sounds too good to be true, it probably is’. This is especially true when it comes to the stock market, where scams and frauds are hiding around every corner of your investment journey.
We won’t discuss high-profile scams like the Harshad Mehta, Ketan Parekh, or Satyam Computers scam. Because those scams are just the tip of the iceberg, and as a newbie investor, it’s easy to fall prey to lesser-known, equally destructive scams.
Some of the most common scams in the Indian stock market are often executed by individuals or small groups, making them even harder to detect.
As Warren Buffett famously said, ‘Risk comes from not knowing what you’re doing’. Hence, to protect yourself and your investments, it’s essential to educate yourself on the signs of a stock market scam and take the necessary steps to avoid them.
Two Major Stock Market Scams You Must Know
How Advisors Take Advantage of Beginners’ Enthusiasm?
This is a scam where beginners making losses on their investments are the target of fraudulent advisors.
Now, imagine every investor who has just started on their investment journey is enthusiastic about making profits. But, lack of knowledge often leads to losses and hence, some fraudulent advisors who claim themselves as market experts pitch them a scheme where they would be trading from the investor’s account and help them make profits.
While it is okay to pay a fee to a SEBI-registered Investment adviser to help you in your investment journey, they would not ask you to give access to your Demat account.
But, in the case of fake advisors, they ask you to share the login credentials of your Demat account. This exposes you to a risk of a fraudster who can pretty much do so many things using your Demat account, and you won’t even realise that you have been scammed.
So, this is how the scam takes place. The fraudster would trade in an illiquid option contract and place illegitimate trades. They would buy it at a high price and sell it at a low price, leading to a loss in your account but a profit in another account. You might think that this is a genuine loss. But this is where you have been scammed.
SEBI considers such trades as circular trading.
What Must You Do?
- You must never share your login credentials with anyone enabling others to trade on your behalf.
- Always set up a T-Pin or T-OTP to add security to your account.
Pump and Dump Scheme
The famous actor Harshad Warsi, AKA Circuit from Munna Bhai M.B.B.S., was featured in allegedly pumping up the prices of two stocks. Intrigued about what happened next? – Read the article.
So, this is an age-old scam and is very popular among retail investors. It involves manipulating the prices of small, low-value stocks by a group of people. These fake manipulators artificially drive up the stock prices to attract retail investors before selling off their own shares at a profit, causing the stock to plummet.
These schemes are easier to detect, but people still fall prey to them because of fear of missing out and greed.
It’s important to remember that there are no shortcuts to wealth, and hence you must avoid falling for stock tips offered on social media platforms.
Secondly, fraudsters often send stock tips through SMS from the name of reputed broking firms. So, you must not blindly follow any recommendations blindly and do your research no matter what.
To conclude, the stock market can be daunting, especially for beginners. While it presents many opportunities to grow wealth, it is important to remember that scams and frauds exist.
By staying vigilant, you can safeguard yourself and your investments from falling prey to these scams and frauds and pave your way towards a successful investment journey.