Stock market scams and how to avoid them – Pump and Dump Scam
In the stock market, some stocks suddenly become super valuable, giving investors a lot of money, even 1000% more in just a few months. It’s hard to guess when this will happen. But despite this, lots of places on YouTube, WhatsApp, and Instagram keep saying which stocks will make lots of money:
– They might claim a ₹10 stock will soar to ₹50 within a month.
– Or, they assert a ₹50 stock will touch ₹500 in just three months.
– Some even promise that an investment of ₹10,000 will balloon to ₹1,00,000 within six months.
These predictions, however enticing, are typically inaccurate. So why make them? The motive is to execute a ‘pump and dump’ strategy.
But what is the pump and dump strategy?
In a pump and dump strategy, the operators (people who hold the majority of the shares of the company) of these penny stocks move the price of the stocks up and down at will. To move the price up, the operators start placing small amounts of buy orders at higher prices incrementally, and since they own all the stock, the price starts moving up. Once it has moved up enough to make retail investors greedy – a buzz is created using various methods such as:
– Paid promotions on social media platforms like YouTube, Instagram, Facebook, and Twitter.
– Communities on messaging apps such as Telegram and WhatsApp.
– Mass texts (SMSes) and emails.
These operators collaborate, artificially inflating the stock’s price by trading among themselves. In certain cases, even company promoters might participate in this practice, engaging in trades with related parties or other operators.
Since the ultimate aim of these operators, or rather scammers, is to manipulate retail investors, they resort to acquiring phone numbers and email addresses through malicious social engineering or purchasing such data. Certain apps and online services, in pursuit of revenue, might willingly sell your contact information.
The lure of quick gains often entices small investors, resulting in a surge in the stock’s price. Yet, as these market operators quietly exit at inflated prices, trading activity plummets, causing the stock price to decline. With fewer buyers when investors try to sell, the selling pressure worsen the price fall, leaving small investors with substantial losses.
Here are some examples of Pump and Dump stocks
How to avoid falling for such scams?
– Steer clear of penny stocks, microcaps, or stocks with erratic information flow, as they can be rigged or financially precarious.
– Exercise caution when stocks display extreme price or volume fluctuations.
– If an opportunity seems too good to be true, it likely is. Exercise restraint.
– Conduct your due diligence rather than relying on sensational or urgent information.
– Opt for safer investment avenues like mutual funds if you prefer a more secure approach.
The Bottom Line
Remember, it’s smart to be careful in the stock market. Don’t get tricked by big promises of making fast money. Stay away from risky stocks that change a lot. Trusting your own homework is better than believing what others say. Safer options like mutual funds can be a good idea.
Disclaimer: The stock names mentioned in this blog are for educational purposes only.
