Everyone has to make money easily, and that is the reason why they enter the stock market. But, as a scientist has said, “The stock market is the most difficult place in the world to easily earn money for long periods.” And we realize this only when we see any loss. Because of this, we start behaving irrationally in the hope that we can recover the loss of money. The smartest person is also a victim of fraud in that weak moment. The two frauds below are the most common ones you should be aware of.
Fraud advisor who intentionally causes harm
When we suffer loss, then we accept the advice of anyone. Of course, there are many advisors and trainers who can help us, but there are many fraudsters who claim to be market experts on social media and wait to be hunted if you show weakness.
While it is fine to get help from SEBI (SEBI) registered investment advisors by getting fees or being trained by an expert to trade, you will have to control your login credentials by sharing them with a third party, this will mean that your account Using non-genuine trades, that person can create a loss and transfer your money to another trading account, making it very difficult for you to find that your account has been scammed.
More than 30,000 options contracts are listed on the exchange, but only a fraction of them are actively traded, the rest being illiquid. These option contracts where there is no other trading are used by the frauds to place non-genuine trades, which creates losses in your account and gains in other trading accounts. You would assume that this is a real market loss, but it clearly is not.
Apart from the loss, you are now coming forward for regulatory action. Such trading activity in your account will be seen by the Income Tax Department (Income Tax Dept) as money laundering (causing losses to avoid taxes, or converting white to black money or vice versa). SEBI considers such trades as circular trading. In addition to the monetary penalty penalty, you could potentially be banned from SEBI for trading.
What can you do?
- Never share your login credentials with anyone.
- If you don’t understand option trading, don’t trade them, even if someone is asking you. Options are risky and you need to understand them well before trading them.
- If you understand the options, then know that when illiquid options are traded, you can change the liquid strike and its underlying by using its Fair Value Employed Volatility (IV). You can see IV and Option Chain on Kite and use our B&S calculator.
- If you have given access to someone who has incurred such artificial harm, you can file a police complaint against that fraud, tell our Compliance team about it, and do whatever is necessary to prove the fraud Yes, we will help you.
What are we doing
- Since we have recently seen an increase in such cases, you now have a good option on the order screen to help you even when you are cheated by someone. Orders will be rejected on option contracts that we believe can be used to lose non-genuine trades to create losses on your account.
- As a secondary check, we will run a background risk process to notify orders to be placed at any price at any time, which is far from the theoretical price of illiquid options (calculated using IV of liquid strike Will be done). If the trades are found to be non-genuine, we will request the exchange for cancellation of trading and regulatory action.
Pump and dump scheme
Pump and dump schemes have been made famous in many films based on the stock market, and are therefore much easier fraudulent to detect. But still, greed makes many a victim of it. Of the 4900+ companies listed on the stock exchanges, over 1700 companies are called penny stocks. Penny stocks are small companies with a market cap of less than Rs 100 crore. While there are many genuine small companies, there are many that are listed on the exchange without any real business.
In a pump and dump scheme, the operators of these penny stocks (the ones holding the majority of the company’s shares) decrease the stock price by increasing their willingness. To move the price up, operators start casually placing small amounts of purchase orders at a higher price, and since they all own the stock, the price begins to rise. Once this price has moved enough to make retail investors greedy – a buzz is created via SMS, social media and online forums to increase the price even further. This usually happens when most people suck the stock and when the operator starts selling the stock. As soon as the sale is closed at these high prices, the discussion of that stock also closes and the stock returns to the starting price where no one is given a chance to exit the position. Here are some examples.
Again, apart from the disadvantages, there is another issue to consider. Our Finance Minister (FM) imposed a 10% Long Term Capital Gain (LTCG) tax a few years ago, mainly to control money laundering fraud, which runs from such penny stocks, a fraud that is worth thousands of crores. Used to be The operator who moves the price of the stock from around 0 to very high before selling will also do so by holding the stock over 1 year to benefit from a low long-term capital gain (LTCG) tax (10% now). (0% earlier only) on profits. The operator is therefore not potentially ruining the financial health of many gullible investors, but in the process is likely to convert one’s black money into tax-free white money. With LTCG now at 10%, it now becomes the cost for an operator to convert black to white, with the government hoping that it can act as a deterrent. The Income Tax Department keeps a close watch on all those dealing in such suspicious companies. This means that, even if you have traded some money from such a stock, you may get an income tax check notice, which could potentially lead to a penalty of more than the profit earned.
What can you do?
- Nobody trusts who is giving a guaranteed stock tip to make money. Do your research before investing, at least confirm if the business and promoters are genuine.
- Do not trust an SMS even if it seems that it has come from a reliable source. Many fraudsters send SMS using shortcodes that look like it is from a reputable brokerage firm.
- If you get an SMS that asks you to invest in a penny stock, be sure to report it to TRAI and help protect others from fraud. Check on how to report to TRAI. Also, post it here, so that we can alert all other users.
- Stay away from penny stocks, and if you have decided to eliminate greed, think of it as a lottery ticket that could possibly be worthless. Therefore, only invest what you can afford to lose.
What are we doing about it?
Now we have Penny Stock Nudge on our purchase order window (for now on the web and soon on mobile). The idea is to alert you if you do not know that the investment you are making is in a penny stock, and we will also have an additional warning for the stock that we think is currently available on SMS tips and social media Are being manipulated through discussion. Of course, you will be free to proceed, but hopefully, you have not won, and even if you did, you would minimize the size of the trading to reduce your risk.
We hope that you will share the above information with more and more people and help protect them from falling prey to such fraud. If you are trading in Zerodha, we will do our best to ensure that you do not cheat through the pieces mentioned above.