Online brokerage Zerodha recently warned investors about the ‘pump and dump’ scam. It said it is one of the oldest stock market scams. The company added that there have been several cases in the past few months alone that have received media attention, but there are also those that go unnoticed. Here’s what Zerodha said about the ‘pump and dump’ scam:
What is ‘pump and dump’?
In a pump and dump, operators who hold the most shares move prices by spreading messages via SMS, social media and then dump the shares once the price rises, Zerodha said in a series of tweets. Pump and dumps is one of the oldest stock market scams.
It added that SMS, Telegram and WhatsApp were the most popular channels to spread these stock tips for a long time. But lately, people with a lot of followers on social media and YouTube are getting paid to promote stocks through tweets and videos.
“Many investors, unconsciously or driven by greed, fall for these tips. They jump in when they see a stock hitting the upper circuits, but are stuck once the operators dump the stock. In virtually all cases, these stocks crash by more than 90 percent and become worthless,” it added.
Consciousness needed
Zerodha said: “Although this is a known scam, many people still fall for it. Over the years, we have regularly informed investors about these scams on Z-Connect, @tradingqna, etc…. We even have a Nudge on Kite to warn users when they are about to buy these dubious stocks, but not all of these pumps and dumps can be known, so it’s impossible to warn users 100 percent of the time.”
He added that there are thousands of channels on trading and investing today. For every sensible channel there are 100’s that are downright scams. Ironically, the scammers have the most subscribers.
Advice for investors
“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 in the stock market. If something is too good to be true, it almost always is!” is in one of the tweets.
It said that the markets can seem scary when one is new, but things can get easier when one has a working knowledge of investing. “That’s why we spend time writing and answering questions on @ZerodhaVarsity.”
“Start with mutual funds or ETFs instead of direct stocks if you’re new to investing. You can then spend some time learning, figuring out what works for you, and investing accordingly,” Zerodha said.
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