Have you bought this next Multi-bagger in the making?
Do you think the headline above is informing you about the next multibagger?
Well, this is exactly what market operators do to attract you to their unsolicited tip. In our new article series titled #InvestorHeetMeinJaari, we talk about the oldest stock market scam that is alive even today – “The Pump and Dump Scheme.”
You may have heard or been a victim of this scheme. And it’s okay, if you have. Because people in our organization, of course, before joining us, have also fallen prey to such enticing calls. However, there is much you can learn from this mistake.
Let’s start with understanding more about the Pump and Dump Scheme.
Here is a typical message operators send out to initiate their schemes.
MULTIBAGGER JACKPOTT STOCK
-Stock – RST ltd.
-Entry price ABC rs.
-Target: XYZ rs.
-Earn BCDE% returns in 3 months
-No advance payment
The Pump and Dump scheme means an operator buys a stock at a low price, inflating its price to superficial levels and then selling it once innocent investors get onto the buying frenzy.
According to Investopedia, “A Pump and Dump scam is an illegal act of an investor or a group of investors promoting a stock they hold and selling once the stock price has risen following the spurt in the investors’ interest as a result of their endorsement.”
Mediums for Pump and Dump
The Pump and Dump scheme has existed since the inception of the stock market. When there was no internet, fraudsters used traditional methods like cold calling or wrong number trick to circulate Hot Tips about a particular stock to inflate its price.
Here the brokers would cold call innocent investors and pressurize them into buying these stocks. They would also use strategies where they left messages on the answering machine with misleading information regarding the stock. Such messages made it look like it is a missed call with the information not intended for the receiver.
With the advent of technology and internet, fraudsters have evolved their methods of tricking naive investors into their lucrative trap. The introduction of mobile phones exposed them to SMS services while the emergence of internet exposed these fraudsters to emails.
These days, fraudsters post messages online on social media platforms enticing budding investors to buy stock quickly, with claims of inside information about developments that will lead to a spurt in the share’s price.
Once the buyers rush to buy these stocks, these operators sell their shares in large quantities. It results in a dramatic drop in the share’s price, with new buyers losing their money.
Penny stocks at the operators’ mercy
The Pump and dump schemers usually target penny stocks. Because penny stocks can easily be manipulated even with small volumes, operators don’t need much effort to push the stocks higher say from Rs. 10 to Rs. 20.
Fraudsters also use large-cap stocks but given the market capitalization and huge volumes, it is difficult to manipulate these stocks.
They promote these stocks as a ‘Hot Tip’ or ‘The Next Big Thing’ with a false insider tip that will send the stock price soaring. Such schemers use psychological cues like (FOMO) the Fear of Missing Out, because no one likes to miss-out on enticing opportunities. Thus, the search for multi-baggers like Relaxo, which grew from Rs. 14 to Rs. 1,210 is why retail investors to fall prey to such Pump and Dump schemes.
Scammers have adapted to the changing dynamics of the stock market, but for an investor, the conditions to be safe remain the same. If you do your homework and stay away from quick tips and recommendations, no one can dupe you into such schemes.
That’s it from this article.