Understanding three Most Common Scams in Indian Stock Market: Harshad Mehta Scam, Ketan Parekh Scam, Satyam scam – These are some of the quite popular stock market scam that you might have heard of already. However, there also are a number of other common scams in Indian stock market which most newbie investors are not aware of and which result in many investors losing their hard-earned money.
These financial scams, although not very seriously taken by most governing bodies, are still so common that thousands of people become victims of these swindles. Today, we’ll discuss three of the most common scams in Indian stock market so that you can stay away from these rackets and protect yourself from these financial frauds and schemes. Keep reading
3 Most Common Scams in Indian Stock Market
Here are three of the most frequently used scams in the Indian stock market by different market fraudsters:
1. Guaranteed Tips and Recommendation Fraud
‘Guaranteed Tips and Results’ is one of the widely used and most common scams in Indian stock market. Here, the fraudsters try to attract new traders/investors by convincing them that they can provide a profit of as much as 3-10% per day and 30-40% per month.
Before moving forwards, please note that Warren Buffet, the legendary investor, has got a yearly return of around 22% to become one of the richest people in the world. Therefore, have realistic expectations while entering the stock market.
Anyways, these fraudsters are promising monthly high returns to their clients if they follow their paid tips. They further assure the people to give over 90% accuracy on their tips and recommendations. Now, let us understand how this scheme works.
These fraudsters argue that they have given a minimum of 40% return to their old clients. When people ask for trial tips before subscribing to their paid tips and recommendation program, they agree. (Although, most good companies clearly deny recommendations without complete registration).
Many people who try these trials become victims of these fraudsters afterwords. All the tips provided by them during the trial period proves to be 100% accurate. Seeing the results of the trial period, the traders/investors subscribe to the monthly/yearly recommendation plan of these fraudsters. They pay a high fee to subscribe to these subscription plans. However, after the registration, most of their tips don’t work.
Now, let us see how these fraudsters are able to provide 100% accurate recommendations during the trial period.
Suppose, these fraudsters agree to give a trial period of 3 trading days. In other words, they agree to give 1 recommendation to buy or sell a stock for three trading days. But there is a dark side to this scheme that the investors do not know. During these three days, they don’t send the tips to just one person. They generally send the tips to thousands of people.
Let us say, they start the free trial service with 1,000 people initially to send the tips.
Day1: On day 1, these fraudsters send alert messages of ‘SELL’ call of stock to 500 people and ‘BUY’ call to other 500 people for the same stock. Obviously, either the stock will go up or go down (they generally choose a highly volatile stock so that the probability of stock moving upward or downwards is higher). Therefore, on day 1, they have sent a successful tip to 500 people. They, discard the other 500 people for whom the tip didn’t work.
Day2: On day two, they again send a message to SELL another group of 250 people and BUY the stock to the other 250 people. Obviously, again one group will receive the correct recommendation. They again discard the other group whom they sent the wrong tip.
Day3: On the last day of the FREE trial, they send buy suggestion to 125 people and sell suggestions to another group of 125 people. Hence, 125 people will receive the correct tip for three consecutive days of the trial period.
Now, these 125 people will now think that all the recommendations provided by these fraudsters for three continuous days were correct. Therefore, many of the people from this group will subscribe to the tips and recommendation plan and become a victim of one of the most common scams in Indian stock market.
Let us assume that the charge for the subscription plan is Rs 30,000 for a year. If even 20 people are trapped in this scam, these fraudsters easily make around 30,000*20 = Rs 6 lakhs, simply by sending fraud SMS.
Soon after subscribing to the tips from these fraudsters, the investors/traders start losing money. The tips aren’t working anymore. Overall, these people lose their money apart from paying a heavy registration fee for taking guaranteed tips and recommendations.
2. Pump and Dump:
Pump and Dump is typically a penny stock (or micro-cap stock) fraud, where the fraudsters try to inflate the price of these small companies by providing misleading information to investors and traders. They try to increase the price of these penny stocks by giving fake news and later dump the stocks to book profits when the prices are high enough.
For example, if the fraudsters (or the operators) want to increase the price of XYZ stock, then they will send bulk messages of optimistic news or buy calls for this stock. They may send messages like a big company is going to invest in the stock soon; or that the stock is giving a hefty dividend; or any other favorable news about the company.
The fraudsters want to increase the demand for this stock and the retail investor to buy the shares of these stocks as much as possible. Let us see what the main aim of these fraudsters is.
- First, these fraudsters buy a cheap penny stock at a large volume.
- Then, they send fake messages or emails to millions of investors/traders recommending them to buy that stock.
- Those who consider this news as true, start buying stocks of these companies.
- Because of this increased demand, the price of that stock starts increasing.
- When the share price reaches a good price, then these fraudsters sell their stocks and make good returns.
After selling their stocks at high prices, these fraudsters stop sending emails/messages to the people. Moreover, the price of these stocks becomes very volatile, as they are not worth that high price.
Hence, soon after the fraudsters dump their stock, the price of these stocks falls heavily and the retail investors lose their money. Many common investors are the victim of this ‘PUMP and DUMP’ scheme.
3. Fake Messages in the name of Reputable Brokers/Brands
Many people invest in the stock market based on the recommendation of their stockbrokers or advisers. As these investors trust their brokers, they don’t research much about the stock after receiving the recommendation/tips. Instead, they buy stocks trusting the messages from their brokers or advisers.
But what if the ‘Buy/Sell’ recommendation was not sent by your broker?
For example, Zerodha – the biggest stockbroker in India, is a discount broker and doesn’t offer advisory services to its clients. However, Zerodha clients still get recommendations in the form of SMS on their phones. How so?
In this third common scam in Indian stock market, a lot of fraudsters trap the retail investors by using the trust in their brokerage firm. They send messages in the names of their brokers recommending them to buy certain stocks. As these people, misunderstood the message and think that it is sent by their brokers, the investors may buy the recommended stocks.
However, the recommendation did not was truly sent by their brokers. Hence, the stock prices fall soon and these investors/traders lose a huge amount of money.
Let’s see why these fraudsters send these messages to retail investors/traders.
Initially, these fraudsters send the recommendations to buy the same stock to their paid subscribers. Then, they try to inflate the price of these stocks by sending fake messages in the name of registered brokers or branded advisors to common investors. When the stock price starts increasing, they suggest their paid subscribers sell that stock and get a good return. Therefore, their paid customers are satisfied with the recommendation and continue to their paid recommendation plan.
However, in the end, it’s the retail investors who end up losing their money by blindly following the fake recommendations. This is the third most common scams in Indian stock market that every investor/trader should be aware of if they want to safeguard their money.
Today, we looked into three of the Most Common Scams in Indian Stock Market that are still prevailing and looting the retail investors. Although SEBI is taking steps to safeguard the interest of the common investors and save them from these scams, there the Indian stock market still has a long way to go against these fraudsters.
Anyways, before ending this article, we would also like to mention that not all advisory companies try to loot their customers and they do provide some great guidance and recommendations. However, it is advisable to stay away from free stocks tips and recommendations of any type. After all, no one cares about your money more than you.
That’s all for this article on Most Common Scams in Indian Stock Market. Do comment below if you have ever been a victim of any of these scams. Have a great day. And happy and safe investing!
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting