The stock market is a place where millions of people invest their money in hopes of earning profits. However, not everyone who participates in the market is honest and fair. There are some who cheat, manipulate, and deceive others to gain an unfair advantage or to cover up their losses. These unethical practices not only harm the victims, but also erode the trust and confidence in the market. Therefore, it is important for traders and investors to be aware of the common ways that some cheat in the stock markets, and how to protect themselves from being duped.
One of the most common ways that some cheat in the stock markets is by insider trading. This is when someone uses confidential or non-public information about a company or a security to buy or sell it before the information becomes public. For example, if an employee of a company knows that the company is going to announce a merger, a new product, or a bad earnings report, and uses that information to trade the company’s stock, he or she is engaging in insider trading. Insider trading is illegal and punishable by law, as it gives an unfair advantage to the insider and harms the other investors who do not have access to the same information.
Another common way that some cheat in the stock markets is by market manipulation. This is when someone tries to influence the price or volume of a security by creating false or misleading signals, rumors, or news. For example, if someone buys a large amount of a stock and then spreads positive news or recommendations about it to create a hype and attract more buyers, he or she is manipulating the market. Similarly, if someone sells a large amount of a stock and then spreads negative news or rumors about it to create a panic and induce more sellers, he or she is also manipulating the market. Market manipulation is also illegal and punishable by law, as it distorts the true value and demand of the security and harms the other investors who rely on the market information.
A third common way that some cheat in the stock markets is by front running. This is when someone places an order ahead of a large or known order from another party, to benefit from the price movement that the large order will cause. For example, if a broker knows that a client is going to buy a large amount of a stock, and buys the same stock for himself or herself before executing the client’s order, he or she is front running. Front running is also illegal and punishable by law, as it violates the fiduciary duty of the broker and harms the client who pays a higher price for the stock.
How can traders and investors avoid being cheated in the stock markets? Here are some tips and precautions that they can take:
- Do your own research and analysis before investing in any security. Do not rely on tips, rumors, or recommendations from unknown or unverified sources. Verify the facts and figures from reliable and independent sources, such as the company’s financial statements, annual reports, press releases, and regulatory filings.
- Be skeptical and cautious of any security that promises high returns with low risk, or that has an unusual or abnormal price or volume movement. These could be signs of fraud, manipulation, or speculation. Do not fall for the fear of missing out (FOMO) or the greed of making quick profits. Remember that if something sounds too good to be true, it probably is.
- Diversify your portfolio across different securities, sectors, and asset classes. Do not put all your eggs in one basket, or risk more than you can afford to lose. Diversification can reduce your exposure to any single risk factor, and help you cope with the volatility and uncertainty of the market.
- Monitor your portfolio and the market regularly, and make any necessary adjustments according to your goals and risk tolerance. Do not trade impulsively or emotionally, but rather follow a plan and a strategy. Use tools and software to track and analyze the data and charts of the securities you are interested in, and look for patterns and signals that indicate the best time to buy or sell.
- Report any suspicious or fraudulent activity to the authorities, such as the Securities and Exchange Board of India (Sebi), the stock exchanges, or the police. Do not hesitate to complain or seek redressal if you are a victim of cheating or manipulation. Keep records and evidence of your transactions, such as contract notes, trade confirmations, bank statements, and communication with the brokers or agents.
In conclusion, the stock market is not a place where anyone can cheat and get away with it. There are rules and regulations that govern the market, and there are authorities and agencies that enforce them. However, there are also some who try to cheat and exploit the loopholes in the system, and they can cause significant damage to the market and the investors. Therefore, it is essential for traders and investors to be aware of the common ways that some cheat in the stock markets, and how to protect themselves from being duped. By doing so, they can enhance their chances of success and enjoy the benefits of the market.