Home » Beware, investors. Be cautious of the Pump and Dump stocks.

Beware, investors. Be cautious of the Pump and Dump stocks.

Beware investors of the pump and dump stocks.

When I started my investment journey a few decades back as a first-time investor we were easily impressible. The sub-brokers used to recommend stocks that could double in a few days. Those were the days of the Harshad Mehta Bull Run where the stocks were easily manipulated.

When the Bull Run ended we were really disillusioned having lost money in a few stocks that were weak on fundamentals. Not that there were no good companies. There were the Tata’s and the Godrej groups that were well known for their corporate governance.

The after-effects of the Harshad Mehta scam were the emergence of a strong regulator, the Securities and Exchange Board (SEBI) of India which was empowered by the government, by the SEBI Act 1992.

SEBI took a series of steps to regulate listed and unlisted companies and gave adequate time to the stakeholders to comply with the regulations. Meanwhile, we too had matured as investors after reading books on great investors like Warren Buffet, Peter Lynch, Philip Fischer, and Benjamin Graham.

It is reasonable to expect returns of 12-15% in the Indian stock markets. But beyond that, you have to take risks that are uncalled for. The new investors in their quest to create wealth quickly sometimes invest based on tips in companies that are not strong on fundamentals. There are enough manipulators even today who try to manipulate the stock prices.

Pump and Dump of stocks-

There are many Telegram, Youtube, and WhatsApp groups that promote some or the other obscure stocks. The market operators use social media to lure new and inexperienced investors into trades that end in losses. The new investors come with a hope to make money and try to generate returns to become rich quickly. These Telegram groups have a huge base of subscribers.

A pump and dump scheme encourages relatively new investors to buy shares of a company so as to jack up the stock price. This is done by spreading misleading information through social media channels. Hype is created around a particular stock, leading to an increase in its price and the operators then dump the stock.

The fraudsters organize a planned campaign through social media and online forums and provide false information about the future prospects of the company. A small brokerage firm may employ many sub-brokers to use this dishonest way to sell the shares to unsuspecting investors. There are small media outlets also that are involved in this game. Once the stock price rises, the operators sell their shares, and the price plummets after they sell their shares.

In the pump and dump game, the operators select small stocks that are relatively illiquid and always easier to manipulate. Only a few shares float in the market and with the availability of few buyers, the price goes up. The stock is promoted as a hot tip. One set of investors are advised to buy these shares and the other investors are advised to sell these shares.

Action by SEBI-

SEBI has taken note of such scams and begun a crackdown on the market operators. Sometime back the market regulator imposed a fine of Rs 2.84 crore on six persons and barred them from the stock market. The persons were manipulating stock prices by giving recommendations on social media channels.  It has also restrained these persons from dealing in securities in any manner until further orders.

The situation is like a hydra, if you cut one head more heads grow in its place. On 10th March 2022, the regulator carried out search and seizure operations of seven individuals and one entity in Ahmedabad, Bhavnagar, Neemuch, New Delhi, and Mumbai. It has seized mobiles, laptops, hard drives, and desktops of these persons.

Many small companies are reporting huge growth in revenues and profits and the prices are subsequently manipulated. A separate team of SEBI and stock exchanges will monitor the announcements and financial statements of these companies.

SEBI is doing whatever it can to regulate the market. It comes on individuals also not to fall for these anonymous stock tips and try to aim for reasonable returns from the stock markets. In their quest to become rich quickly they can even lose all of their hard-earned money. It is always wise to study the fundamentals of a company and invest and aim for commensurate returns. Verify if these advisors who are giving recommendations are registered with SEBI. Intimate about these tips and messages to your broker, stock exchanges, and SEBI so that action can be taken. One complaint against the errant operators can save the hard-earned money of so many new investors.

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