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With the Indian stock markets rallying to record highs, and many new investors participating enthusiastically in the bull markets, it's a perfect breeding ground for stock market scams. Online stock brokerage Zerodha in a recent tweet shared how they keep hearing about various horror stories of investors losing money due to the lack of awareness or greed.

"If something is too good to be true, it often is. It's better to stick to the basics and always be cautious. As the saying goes, trust but verify," the brokerage said in a tweet. Educating the investors, Zerodha in its tweet, shared a link of a blog post by CEO Nithin Kamath on how one can identify such frauds and what the brokerage firm is doing to help investors avoid falling for the trap and lose money.

Explaining how stock market scamsters trick investors in a pump & dump scheme, the blog says that 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. To move the price up, the operators start placing small amounts of buy orders at higher prices incrementally, and since they own all the stock, the price starts moving up. Once it has moved up enough to make retail investors greedy – a buzz is created through SMS, social media, and online forums to push the price up even further.

As soon as the selling is done at these high prices, the buzz stops and the stock falls back to the price where the upward journey started without giving anyone an opportunity to exit.

What can you do to avoid stock market frauds?

Never share your login credentials with anyone enabling others to trade on your behalf. If you don’t understand options, don’t trade them even if someone is asking you to. Options are risky and you need to understand them well before you trade them. Also, the brokerage has advised to stay away from penny stocks, and if you did decide to let greed take over, think of it as a lottery ticket which potentially can be worthless. So, invest only what you can afford to lose.

What is Zerodha doing since it has seen a rise in such scams recently?

“We now have an illiquid option check on the order screen to help you out even if you are being deceived by someone. Orders will get rejected on options contracts which we believe can be used for executing non-genuine trades to create a loss in your account," Zerodha stated in the blog.

Zerodha has a penny stock nudge on its buy order window which alerts investors if they don't know that they are investing in a penny stock.

The online brokerage has also advised investors to not trust stock tips that promise quick returns and SMS' asking to invest in penny stocks. “Many scammers send SMS using shortcodes that make it seem like it is from a reputed brokerage firm. Variations of the name “Zerodha" have been illegally used by scammers recently."


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