New Delhi: Stating that ‘pump and dump’ is one of the oldest scams in the stock market, brokerage firm Zerodha said that even though an investigation is done in some cases, most of the cases go unnoticed. The online broking agency further said that there is a high need to educate investors about this scam. It also explained how one can be cautious to avoid such frauds.
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What is ‘Pump and Dump’?
Pump and dumps are one of the oldest scams in the stock market. In a pump and dump, operators who hold most of the shares move the prices by spreading messages through SMS, social media and then dump the shares once the price rises. SMS, Telegram, and WhatsApp were the most popular channels to spread these stock tips for a long time. But of late, people with large followings on social media and YouTube are being paid to promote stocks through tweets and videos.
In the last few months alone, there have been multiple instances that got media attention. But there are several that go unnoticed.
Pump and dump schemes have been made famous in many movies based on stock markets, and hence a much easier fraud to detect. But still, greed causes many to fall prey to it. Out of the 4900+ companies listed on the stock exchanges, over 1700 are what are called “penny stocks”. Penny stocks are small companies with market caps of less than Rs 100 crores. While there are many genuine small companies, there are also many that aren’t. In a pump and dump scheme, 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.
A lot of investors, unknowingly or driven by greed, fall for these tips. They jump in when they see a stock hitting upper circuits, but are stuck once the operators dump the stock. In pretty much all the cases, these stocks end up crashing 90%+ and become worthless. Though this is a well-known scam, a lot of people still fall for it. Over the years, we’ve regularly educated investors about these scams on Z-Connect.
Though this is a well-known scam, a lot of people still fall for it. Over the years, we’ve regularly educated investors about these scams on Z-Connect, @tradingqna, etc. But, not all of these pumps and dumps can be known, so it’s impossible to warn users 100% of the time.
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Some Tips to Avoid Being Duped
- Don’t trust stock tips that promise quick returns. Do your research before investing. At least, confirm if the business and promoters are legitimate.
- Don’t buy or sell based on random stock tips on Twitter, YouTube, WhatsApp, etc. You’re investing your hard-earned money. There are no easy ways to get rich quickly in the stock market. If something is too good to be true, it almost always is.
- Having said that, we understand that the markets can seem scary if you are new. But things can get easier if you have a working knowledge of investing.
- Start with mutual funds or ETFs instead of direct stocks if you are new to investing. You can then spend some time learning, figure out what works for you, and invest accordingly, Zerodha advised.
