Stock market scams in recent times have shaken investor confidence, causing major losses. Dive in to see how you can protect yourself from such scams.
This week, news emerged of two seasoned stock market investors being scammed by fraudsters. Methods used included adding victims to WhatsApp groups where screenshots of fake profits were posted. The victims were thereby lured into a fraud investment app and asked to route money into their ‘investments’ via certain bank accounts. Eventually, the entire setup was discovered to be fake, duping investors of crores of rupees.
How To Protect Yourself From Stock Market Scams?
The aforementioned type of scam is becoming increasingly common in India. In order to protect yourself from such scams, you can adopt the following tactics:
- Beware of Unsolicited Investment Advice: Don’t be fooled by investment tips that come out of the blue on social media, through phone calls, or in text messages. Legitimate investment firms will not resort to these unsolicited tactics to solicit new clients. They understand the importance of building trust and will typically reach out through established channels or when you initiate contact.
- High Returns Don’t Guarantee Safety: If someone promises guaranteed high returns with little to no risk, it’s a major red flag. The stock market, by its very nature, involves inherent risks. There’s no such thing as a surefire way to make money in the investment world. Anyone who claims otherwise is likely trying to deceive you.
- Stay Clear of Suspicious Links and Apps: Be cautious of clicking on links or downloading investment apps that seem suspicious. Scammers often create fake apps or websites that mimic legitimate ones to lure unsuspecting individuals. If something appears untrustworthy, it probably is. Trust your gut and avoid any interaction.
- Protect Your Demat Account Credentials: Your Demat account credentials are like the keys to your financial vault. Never share them with anyone under any circ*mstances. Legitimate investment professionals will never ask for your Demat account login information. If someone pressures you to disclose this sensitive information, it’s a clear sign of a potential scam.
- Don’t Be Rushed into Transferring Money: Take your time and conduct thorough research before investing any money. Scammers frequently use high-pressure tactics to try to rush you into making a decision before you have a chance to investigate the opportunity properly. Don’t let anyone pressure you into transferring money to unknown bank accounts or investing directly from your bank account without fully understanding the implications.
It is always best to consult with a registered financial advisor. You can also verify the legitimacy of a brokerage firm or investment advisor with the SEBI.
This sort of scam is being performed at the rate of one or two victims at a time. However, scams of far greater magnitude have happened in the past, both in India and abroad. Let us check out some of these scams in detail!
History of Stock Market Scams
The allure of the stock market, promising riches and a comfortable future, can and has been tarnished by cunning scams. These deceptive schemes have not only eroded investor trust but also triggered financial chaos and substantial losses. Let’s delve into six of the most notorious stock market scams that sent shockwaves through the financial system.
The Harshad Mehta Caper (1992)
This infamous Indian securities scam involved stockbroker Harshad Mehta manipulating the market through a complex web of “circular trading”. He exploited loopholes in the banking system to siphon funds from interbank transactions and used the money to inflate stock prices artificially. He also allegedly misappropriated over 2.5 million shares of various companies via forged share transfer documents. However, the deceitful scheme eventually unravelled, leading to a market crash and significant investor losses.
The Original Ponzi Scheme (1920s)
Charles Ponzi, the mastermind behind this scheme, lured investors with promises of high returns via arbitrage in international reply coupons. However, it was a house of cards. He used funds from new investors to pay off existing ones, ultimately leading to a collapse that brought financial ruin to many.
Enron’s House of Cards (2001)
The Enron scandal exposed a web of corporate deceit. This energy company engaged in accounting manipulations, such as mark-to-market accounting instead of historical cost accounting, and concealed transactions to create the illusion of inflated profits while hiding mountains of debt. When the truth surfaced at a time when Enron was already in financial trouble from a failed broadband network venture, Enron declared bankruptcy.
This caused immense financial losses for shareholders and employees. This scandal led to the downfall of Arthur Andersen, a prominent accounting firm, and stricter regulations on corporate governance and financial reporting.
WorldCom’s Accounting Charade (2002)
WorldCom, a major telecommunications company, became embroiled in a massive accounting scandal in 2002. They resorted to fraudulent practices, inflating profits and concealing expenses. The scheme involved improper capitalisation of costs, fake accounting entries, and manipulating revenue recognition. When the truth came to light, WorldCom filed for bankruptcy, leading to significant financial losses for investors and employees. This scandal exposed weaknesses in corporate governance and paved the way for increased scrutiny and stricter regulations.
Madoff’s Grand Illusion (2008)
Bernie Madoff orchestrated one of the largest investment frauds in history. He promised high returns with a fictitious investment strategy, but in reality, he ran a Ponzi scheme. New investors’ money funded payouts to earlier ones. The scheme finally crumbled during the 2008 financial crisis, resulting in billions of dollars in losses for investors. Madoff was convicted and sentenced to 150 years in prison, highlighting the need for stricter regulations and thorough due diligence in the financial sector.
These are just a few examples of the many scams that have plagued the stock market. By being aware of these deceptive tactics, investors can be better equipped to protect themselves and their hard-earned money.
Final Words
In a world of Bernie Madoffs and Charles Ponzis, it is best that you invest in the stock market via legitimate players who have their information transparent.
Angel One is not only a trusted broker platform with a history of over 25 years but also a publicly listed company. So, if you are new to the stock market, open your free demat account with Angel One today and experience investing on a whole new level!
Disclaimer: This article has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations.
