Online brokerage Zerodha recently warned investors against the ‘pump and dump’ scam. It said it is one of the oldest scams in the stock market. The company added that in the last few months alone, there have been multiple instances that got media attention but there are several 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 most of the shares move the prices by spreading messages through SMS, social media and then dump the shares once the price rises, Zerodha said in a series of tweets. Pump and dumps are one of the oldest scams in the stock market.
It added that SMS, Telegram, & WhatsApp, were the most popular channels to spread these stock tips for a long time. But of late, people with large followings on social media and YouTube are being paid to promote stocks through tweets and videos.
“A lot of investors, unknowingly or driven by greed, fall for these tips. They jump in when they see a stock hitting upper circuits, but are stuck once the operators dump the stock. In pretty much all the cases, these stocks end up crashing over 90 per cent and become worthless,” it added.
Awareness Needed
Zerodha said, “Though this is a well-known scam, a lot of people still fall for it. Over the years, we’ve regularly educated 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 pump and dumps can be known, so it’s impossible to warn users 100 per cent of the time.”
He added that today, there are thousands of channels about trading and investing. For every sensible channel, there are 100s that are downright scammy. Ironically, the scammy ones tend to have the most subscribers.
Advice For Investors
“Please 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 quick in the stock market. If something is too good to be true, it almost always is!” it said in one of the tweets.
It said the markets can seem scary if one is new but things can get easier if one has a working knowledge of investing. “This is why we spend time writing and answering questions on @ZerodhaVarsity.”
“Start with mutual funds or ETFs instead of direct stocks if you are new to investing. You can then spend some time learning, figure out what works for you, and invest accordingly,” Zerodha said.
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