Introduction

While stock markets are filled with promise and potential, they are also home to fraudsters who rob innocent investors of their hard-earned money.

As part of the investor awareness initiative, we are covering all such scams to make sure that you don’t fall victim to such insidious practices.

Starts from the Top (usually)

Here’s how it works…

A promoter of a company, who owns a significant number of its shares wants to offload or sell his shares, but the problem is that the stock price is down in the dumps because of the company’s bad financial performance.

Now, the company’s fortunes are not going to improve. So his dilemma is how to get the share prices up so that he can sell them at profit.

So he contacts one of these shady stock market operators and asks him to “pump” the shares- meaning to increase the share prices by hook or by crook.

This operator is a seasoned professional and he knows that this garbage of a stock will not fly unless there is some serious trading activity in it.

The “Pump” Phase

So, he, along with his other operator buddies, start trading this stock aggressively – just buying and selling among themselves.

This artificially pumps the stock prices up and slowly the stock starts showing up on an investor’s radar. Thinking it as a legitimate price volume breakout, some investors start buying the stock. As a result, the stock moves up further.

However, that’s not enough. This operator was not asked to just move the stock a few percentage points up. His job is to generate such a public hysteria about the stock that it trades at its all time highs.

So, now he launches a mass propaganda campaign.

He sends out thousands of fake SMS messages to retail investors claiming that influential investors such as Rakesh Jhunjhunwala or Radhakrishna Damani are buying stocks of this company.

He also circulates similar fake messages on WhatsApp groups, disguising it as a “hot tip” or “insider news”.

He, then gets some newspapers to publish “fake news” about how this company’s fortunes are turning around and how the company will become a multi-bagger in the next few months.

He also gets some TV pundits to declare that this company is a hidden gem and that this is the right time to get into the stock.

The Gullible Investors

All this propaganda slowly starts to kick in and gullible investors start to buy the company’s stock in the hope of making some serious money.

Then comes the auto accelerated phase, where the operator doesn’t even have to do anything. Just like a pyramid scheme, the investors who made money in the initial phases, tell their friends n family about the stock, who in turn tell their friends and family.

All this public hysteria moves the stock into the fourth gear and it starts to make a vertical move.

The “Dump” Phase

It is then when this operator’s job is done and the promoter is ready to dump his shares.

Now, he has to offload all his shares before the public realizes that this was a scam. So he sells as fast as he can and this aggressive selling brings down the prices but they are so far elevated that everyone thinks it’s just a mild correction. Over the next few days or weeks, the promoter is out of this stock.

Now, just like a pyramid scheme falls under its weight, this stock starts to fall under its weight as people realize that it was all a scam.

Some smart investors realize their mistake early on and take whatever losses they incurred and come out, but those who like to “hold and wait” till the stock turns around are up for a very bitter surprise. The money vanishes in front of their eyes when day after day, the stock hits lower circuits and that torture continues for several weeks.

This is how pump and dump schemes enrich shady promoters by robbing investors of their hard-earned money.

Here are some famous cases:

• Amtek India which is known to have financial irregularities and which later changed its name to Castex
• Here’s another of Surana Solar..massive pump and dump operation and this is especially amazing because operators did pump and dump successfully not once but twice in the same stock!
• Pump n dump schemes are orchestrated all over the world. Those who watched Martin’s Wolf of Wall Street know how Jordan Belfort scammed thousands of innocent investors by pumping junk stocks.

In India, although SEBI is trying to crack down on such cases, it is almost impossible to stop all of them. So, it is up to you as an investor to avoid getting trapped.

Advice

Here’s how you can do it

• Do not trust any SMS or WhatsApp message that’s promoting a stock. If the stock was that good why would anyone share that with you?
• The same thing goes with the so-called experts on TV and newspapers
• Do your research, read through the financial statements of the company before deciding to invest a single rupee in a stock.

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