Every stock market investor enters the stocks with the aim of making profits. However, many of them are not aware of the meaning of the stock markets.
Definition of Stock Market
Share Market is defined as the place where the owners of the company raise capital by selling the small percentage of ownership to the buyers. It is a place where the buying and selling of shares is done.
However, when brokers, dealers, insiders, traders trick them to buy shares at unreasonable price, it becomes a share market fraud. It is committed against investors. From Guaranteed income schemes to advance fee for high return scandals, investors are always lured by the cheaters. Opportunities that are too good to be true must pass the smell test.
Types of Stock Market Frauds
There are many different types of stock market frauds having distinct characteristics. Let us have a look at the common share market fraud scenarios.
Shell Companies
Indian government cracked down on the companies which failed to comply with the laws. Securities Market regulators banned them from the stock markets. These companies were termed as shell companies by the government. Shell companies use the names of big brands like Apple or Reliance. They lure the investors to invest and pretend to be group companies of well known brands.
Boiler Rooms
High-pressure selling technique used to peddle shares in speculative or fraudulent securities on the phone. Boiler room frauds occur when brokers recommend stocks that are outside the client’s risk appetite. These frauds allow the brokers to push for penny stocks. This stock fraud frequently results in losses much higher than the client can bear.
Pump and Dump
Share markets are full of rumors and fake news. Additionally, this fake information is purposeful. Misleading information helps in pumping the share prices up. When the stock hits a target price, the dumper sells to rake in substantial profits. Those left holding the stock are stuck. They sell the shares at a loss.
Insider Trading
When any insider deals in stock market to manipulate stock prices on the basis of material, non-public information it is a case of insider trading. Stock Market regulators spend lot of energy in identification of the trades of insiders who are privy to such information.
Churning
In order to create additional brokerage, many brokerage firms give wrong advise to investors and force them to sell off the investments. Large volume of buying and short selling in the investor accounts help brokerage firms to generate significant amount of fee based income.
Financial Statement Frauds
In the light of growing corporate frauds, SEBI (Equivalent of Securities and Exchange Commission in India) keeps an eye on fraud stock brokers. Management intentionally manipulates financial statements to beat analyst expectations.
Additionally, it could involve overstating revenues, understating expenses, using dummy corporations, overstating corporate assets, or understating existing liabilities.
How to Avoid Capital Market Frauds
How can these potential scams be avoided?
In the first place, it is necessary to take out time to perform independent research on any security you buy. If something seems like it is overly complex, rushed, or if important information seems to be omitted, there is likely a reason for this. Investors should follow one principle – if the opportunity is too good to be true then it is. Many ponzi schemes follow this principle.
To summarize, stock market fraudsters are evolving and to fight them effectively, it is necessary to be alert. Indiaforensic, covers many other stock trading frauds at length in its course CSMFA.
Similarly, Phishing, Bogus Chat room scams, identity thefts are evolving with the technology. Certified Stock Market Forensic Accountants (CSMFA) program covers wide array of share frauds coupled with stock market scams. CSMFA play a critical role in investigating growing frauds in capital markets.