5 key tips to protect yourself from pump-and-dump scams in the stock market

Indian investors have been falling prey to pump-and-dump scams increasingly in recent times through digital platforms such as: WhatsApp, telegram, text messages, gmail etc. These scams are followed by false promises of huge returns in a short period of time and lure innocent retail investors into financial losses.

The basic idea behind all these scams is to lure innocent traders and investors based on their greed by ensuring them dream like scenarios of easy high returns and seamless long-term prosperity with minimal to no efforts. Five important points that will prevent you from becoming a victim of these scams are discussed below:

What are pump-and-dump scams?

Pump-and-dump scams generally consist of artificially driving the price of a stock higher through the dissemination of false or deceptive information. The price is inflated i.e., pumped, then the shares are later dumped i.e., sold aggressively in open market, and the price falls when the scam artists offload their stocks, and unsuspecting investors end up losing fortunes.

The scams take place in thinly traded issues where manipulation is easy. Thinly traded means stocks where the equity size is small and very few people are able to actually control the entire delivery of the stock and hence can easily manipulate the price.

What are the red flags to watch out for?

• Unrealistic returns: Avoid advice that indicates high returns and thrill in the short term. The Indian stock market is always believed to provide returns of 12% to 15% on a compounded basis over three to five years. That is why always keep your expectations in check.
• Unsolicited advice: Check the credentials i.e., SEBI registration details etc., of the person offering investment advice. Spammers come with the usual claim of being knowledgeable on WhatsApp groups. Don’t fall for unrealistic expectations and promises.
• Avoid suspicious links: Never click on links or attachments sent by strangers as they will most likely be phishing attacks. Focus on saving your data and never share important financial information such as: Card details, CVV, OTPs etc. No bank ever asks for such personal financial information.
• Pressure to act quickly: Be careful if you receive messages requesting you to invest quickly, suggesting that you will miss out on a “once-in-a-lifetime” chance if you don’t buy. Do remember, scammers often create such narratives to push you into making impulsive purchases.
• Unregistered or unknown stocks: This point emphasises on avoiding all little known or unlisted stocks. Scamsters usually target low-liquidity stocks where price manipulation is easier, as these stocks generally have lower trading volumes. Always cross check stock details on leading websites such as: SEBI, NSE, BSE along with others to understand the business clearly first.

Protecting yourself

To protect your investments, verify that the investment website or application is SEBI or RBI registered. Check your privacy settings from time to time and activate two-factor authentication on your phone to safeguard your personal information. Never interact with unknown numbers or messages on WhatsApp casually.

Try to understand the real reason why someone is sending you a message asking you to participate in one investment scheme or the other? If you feel something is fishy, report the same to the authorities at the earliest.

Stay a step ahead: Keep yourself informed

Stay informed about the current market trends by reading, building knowledge and seeking professional advice promptly through genuine platforms such as SEBI and RBI. All these ideas will go a long way in defining your legacy as a sensible investor.

These simple steps will keep you more alert and safe from scams. This way you can safeguard your investments and overcome the pitfalls of WhatsApp stock tips.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a SEBI-registered advisor before making any investment decisions.