3 Most Common Scams in Indian Stock Market That You Should be Aware of. There are a number of common scams in Indian stock market which has resulted in many investors/traders to lose their hard earned money. These financial scams, although not known to many, still so common that thousands of people become victims of these swindles.
So, today I am presenting you with three most common scams in Indian stock market so that you can stay away from these rackets and protect yourself from the financial fraud and stress.
3 Most Common Scams in Indian Stock Market
1. Tips and Recommendation Fraud
This is one of the widely used and most common scams in Indian stock market. Here, the fraudsters try to attract the traders/investors by convincing them that they can provide a profit as much as 3-10% per day and 30-40% per month. 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. And these people are promising such high returns monthly. They further assure the people to give over 90% accuracy on their tips and recommendations.
These fraudsters argue that they have given minimum 40% return to their old clients. When people ask for trial tips before subscribing to their tips and recommendation program, they easily agree. {Although, most of the good companies clearly deny recommendations without complete registration}.
Many people who try these trials become victims of these fraudsters. All the tips provided by them during the trial period are 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 tips. However, after the registration, none of their tips works well.
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 for 3 trading day. That is, they agree to give 1 recommendation to buy or sell a stock for three trading day. But there is a hidden side to this scheme that the investors do not know. During these three days, they don’t send the tips to just 1 person. They generally send the tips to thousands of people.
Let us say, they started with 1000 people initially to send the tips.
Day1: On day 1, these fraudsters send messages to sell a stock to 500 people and to buy to other 500 people for the same stock. Obviously, either the stock will go up or go down (they generally choose a volatile stock so that the probability of stock not changing price is zero). Therefore, on day 1, they have send a successful tip to 500 people. They, discard the other 500 people for whom the tip didn’t worked.
Day2: On day two, they again send message to sell another stock to 250 people and buy the stock to other 250 people. Obviously, again one group will receive correct recommendation. They again discard the other group whom they sent wrong tip.
Day3: On last day of tip, they send buy suggestion to 125 people and sell suggestion to other group of 125 people. Hence, 125 people will receive a correct tip for three consecutive days.
Now, these 125 people will now think that all the recommendations provided by these fraudsters for three continuous days are 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 sending tips is Rs 15,000 for a year. If even 100 people are trapped in this swindle, these fraudsters easily make around 15,000*100 = Rs 15 lakhs.
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 they money apart from paying a heavy registration fee for taking tips and recommendations.
Also read: 6 Reasons Why Most People Lose Money in Stock Market
2. Pump and Dump:
Pump and Dump is a micro-cap stock (penny stocks) fraud, where the fraudsters try to inflate the price of these micro-cap stocks by providing misleading information to investors/traders. They try to increase the price of these penny stocks by giving the fake news.
For example, If the fraudsters want to increase the price of XYZ microcap stock, then they will send messages like a big company is taking over a that stock; or that micro-cap stock is giving a bonus of 1:1; or A large-cap is buying 50% stake of that micro-cap stock etc
The fraudsters want the retailers 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 take 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 get good returns.
After selling their stocks at high prices, these fraudsters then stop sending email/messages to the people. Moreover, the price of these stocks becomes very volatile, as they are not worth that high price. Hence, soon the price of these stocks falls heavily and the retail investors lose their money.
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3. Fake messages in the name of brokers.
Many people invest in the stock market on the recommendation of their stockbrokers or advisers. As these people trust blindly on their brokers, they don’t research much about the stock after receiving the recommendation/tips. Instead, they just buy these stocks trusting their advisers.
In this scam, a lot of fraudsters, trap the retail investors/traders by using their 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, they buy the recommended stocks.
However, as the recommendation did not truly send 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 to general people. When the stock price starts increasing, they suggest their paid subscribers sell the stock and get a good return. Therefore, their paid customers are satisfied with the recommendation and continue to their monthly/yearly paid recommendation plan.
In the end, it’s the retail investors only 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 investors/trader should be aware of if they want to safeguard their money.
Although, not all advisory company try to loot their customers and some give good guidance and recommendations. Still, 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.
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Tags: Most Common Scams in Indian Stock Market, Stock market scams in India, 3 most common scams in Indian stock market, pump and dump scam in stocks, scams in stock market India, stock market scams India, common scams in stock market
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
