Types of Investment Frauds

Investing in the stock market can sound “all profitable”.

This lady earned “so much” in “such less” time, is a story you might often come across.

As luring as it sounds, you must not fall into the trap of doing what others did in terms of investments.

Many try to make quick gains through wrong means, which can take on many forms:

Pro Tip

Investing Tips are passed around by word of mouth or through social media accounts like YouTube, Twitter etc. by people calling themselves ‘experts’.

These tips temporarily increase the value of the stock since many people are investing in it.

However, the stock price suddenly drops when the ‘experts’ sell their own share of the stock in the market, and most people follow.

This leads to a loss because the price of the stock has gone up due to many people selling it all of a sudden.

This method is also called Pump and Dump.

Thus the chances of you losing your money is more.

Insider Trading

Insider Trading is when someone with information about the price of a public stock, which has not yet been revealed, passes on the information to the general public.

Insider Trading is illegal and can lead to jail, so it is best to stay clear.

Insider Trading can be used to profit a group of people, wherein the information is revealed at a certain fee.

Money Laundering

Money Laundering is the process of converting black money into legally safe money.

This can be done by chanelling the illegally sourced income into various investments in the market.

The funds can be invested in large companies with multiple businesses to hide the numerous transactions and not raise any doubt about the source of the income.

Bogus or Fake Companies

These are duplicate or bogus companies set up to attract people to invest in their shares.

They hire fraudsters to promote them to gain attention.

These schemes promise to offer unrealistically high returns in a short period or even take investments showing themselves to be a popular company.

The public that invests in these companies never receives their return on investment.

Price Rigging

Companies or parties set the price of a stock illegally because it is not based on the conditions of the market and instead is put in place to entice consumer investment.

Price Rigging can be used to increase the price of the stock so that traders can quickly sell their shares at the expense of retail investors—for example, the GameStop incident.

Another way is where operators create a low-return environment surrounding the stock through social media and news channels to get retail investors to sell their shares.

Once the price of the stock reaches its lowest point, the conspirators buy the stock share and sell it later for a profitable price.

Dabba Trading

Dabba trading sells public shares outside the stock market, where the transaction takes place in cash, but the stock is sold at an attractive price.

This type of trading occurs outside the stock market, but the shares sold might be actually listed shares on the stock market.

The act of Dabba Trading is seen as illegal because:

Customers don’t have a Demat account, so they don’t legally own the stock and thus can lose their money

It is commonly used to evade (illegally not pay) tax, STT and CTT

So many ways we can be defrauded!

Don’t worry! Learning about some investing safety practices can definitely help you stay clear of these frauds.

To track your progress

Types of Investment Frauds

Pro Tip

Continue reading to know safe practices of investing