Definition and Classification of Stock Market Frauds


Every stock market investor enters the stocks with the aim of making profits. When brokers, dealers, insiders, traders trick them to buy shares at unreasonable price, investors are cheated. 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. Some of these schemes are discussed here.

Shell Companies

Indian government cracked down on the companies which failed to comply with the laws. Stock Market regulators banned them from the stock markets. These companies were termed as shell companies by the government. Shell companies using the names of big brands like apple or reliance lure the investors to invest in them by pretending these companies 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

False information is spreaded to increase the share prices of penny stocks. When the stock hits a target price, the dumper sells to rake in substantial profits. Those left holding the stock are stuck and must sell 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.


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

SEBI (Equivalent of Securities and Exchange Commission in India) keeps an eye on corporate frauds. Management intentionally manipulates financial statements to beat analyst expectations. 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?

For starters, make sure you 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 are found to fit in this principle.

To summarize, stock market fraudsters are evolving and to fight them effectively, it is necessary to be alert. There are many other share market frauds, which are discussed at length in the course offered by Indiaforensic.

Phishing, Bogus Chat room scams, identity thefts are evolving with the technology. Certified Stock Market Forensic Accountants (CSMFA) program covers wide array of such frauds. CSMFA are expected to play a critical role in investigating growing frauds in capital markets.