Tuesday, 19 Nov 2019

How to avoid stock market scams

Spotting a stock market scam can be tricky. Sometimes, some promises can be too good to be true, such as explicit, ‘get rich quick’ schemes. The more overtly ones can be easily identified, but, in some cases, investors, both new and experienced can fall victims to subtle frauds.

Although stock market frauds are typically arrested before they can blow out of proportion, under the discerning, watchful eye of SEBI, some can slip unnoticed. Even then, there are strict guidelines that every listed company must adhere to stay listed on the stock exchange.

For instance, in a probe against 59 companies for stock market frauds, in early 2018, SEBI discovered an unsettling development. In its inquiry, SEBI detected over 14,700 companies engaging in nongenuine trades through illiquid stock options! The regulatory body took action in a phased manner by initiating adjudication proceedings against 567 entities involved in illegal trading, thus helping to clamp down fraudulent activities in the stock market.

Regardless of whether you have received your stock tips from a friend, colleague, seemingly credible email or text message, it is extremely crucial to be vigilant of potential stock frauds.

Here is how you can avoid getting duped by stock market scams in the Indian stock market.

  • Be wary: If you have received a tip that suggests investing in a new stock, you must ask yourself the following question – Is the entity offering the tip qualified in doing so? Could he have something to gain from your investment through his recommendation? Is the tip widely available? If the advice has come from a financial advisor or a well-reputed stockbroker such as Kotak Securities, you could answer the above questions.

But if you are unable to obtain sound reason on whether the tip is genuine, you may want to seek professional advice and get more information regarding the suggestion.

SEBI warns investors against following stock advice from unregulated or uninformed sources. More often than not, penny stocks have a considerable risk of fraudulent activities, and many investors and traders have burnt their fingers on surreptitious penny stock tips.

Tread carefully, especially if you are unsure about the credibility or motivations of your source regarding the stock advice. In the past, many an investor has regretted ‘hot tips’ that have gone belly up and destroyed their fortunes.

  • Conduct due diligence and research: Typically, stock tips that are fraught with fraudulence may carry an air of urgency. A buy or sell‘right now’ tip could force an investor to make immediate decisions that may not be part of their broader investment strategy. Before you can hit the buy or sell button based on the tip, it is crucial to take the time and effort to research the recommendation. Incidentally, if you have decided to stay in the stock market for the long term, it may not matter what everyone is buying at the moment, and you could hold on longer to study the stock and make your decision after due diligence.
  • Work with a financial expert: New investors can find researching stocks a daunting task. To meet this challenge, you may want to work with a financial advisor or a well-reputed full-services broker such as Kotak Securities. In addition, you may want to continue doing studying various stocks and companies to increase your knowledge.

Seek a trusted stock advisor with years of experience and analytical knowledge. Your advisor must also act as a fiduciary, which means they must work in your best interest. Look into the commissions and fees before deciding on the right broker for your trading journey.

Takeaway

The stock market holds immense potential to build wealth, but it has also scalded many. And although not all stock tips can be detrimental to your capital, just one bad one could cost you your assets.

Sometimes an intuitive answer can be your best ally: Does the stock tip feel too good to be true? If yes, do not hesitate to ignore it, even if it comes from a supposedly trusted friend or colleague. Successful investors stick with broad index funds and diversify their holdings to benefit from the market’s potential and reduce their risks. Following their advice and investment journey can prove to be more beneficial than mere stock tips.

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