The stock market can be a lucrative place to invest and grow your wealth, but it’s also rife with pitfalls that can lead to significant losses. Unscrupulous individuals and organizations use various tactics to cheat stock market traders. Knowing these tactics is the first step to safeguarding your investments.
This article will highlight the top 10 reasons how stock market traders get cheated and provide solutions to avoid these dangerous traps.
1. Pump and Dump Schemes
Falling for artificially inflated stock prices.
In a pump and dump scheme, fraudsters hype up a stock through false or misleading statements to drive up the price. Once the price peaks, they sell off their shares, leaving unsuspecting investors with worthless stocks.
How to avoid pump and dump trap?
- Research: Investigate the company's fundamentals before investing.
- Be Skeptical: Be wary of unsolicited stock tips and rapid price increases.
2. Insider Trading
Trading based on non-public, material information.
Insider trading involves buying or selling stocks based on confidential information not available to the public. This gives insiders an unfair advantage over regular traders.
How to avoid insider trading trap:
- Stay Legal: Avoid acting on tips that come from non-public sources.
- Regulatory Bodies: Trust in regulatory bodies like the SEC to enforce rules against insider trading.
- Ensure the information authenticity: Ensuring the authenticity of received information through reliable source is an option.
3. Penny Stock Scams
Investing in highly volatile and low-priced stocks.
Penny stocks are often manipulated because of their low price and high volatility. Scammers can easily inflate these stocks and then sell their shares, leaving investors with significant losses. In my personal opinion, penny stocks are money eaters and dangerous to approach. You can read on How to find the best penny stocks from this article.
How to avoid penny stock scams:
- Avoid Penny Stocks: Steer clear of stocks trading for less than $5 unless you have thoroughly researched them.
- Diversify: Don’t put all your money into penny stocks; diversify your investments.
- My Personal Suggestion: It is better to avoid penny stocks. Do not attracted to penny stocks by seeing its price as penny stock investing is really dangerous.
4. Boiler Room Scams
Falling prey to aggressive sales tactics.
Boiler rooms are operations where salespeople use high-pressure tactics to sell questionable stocks. These salespeople often make exaggerated claims to lure investors.
How to protect yourself from boiler room scams:
- Hang Up: Be cautious of unsolicited phone calls promoting investments.
- Verify: Always verify the credentials of the person and the legitimacy of the stock being offered.
5. Ponzi Schemes
Investing in fraudulent investment schemes.
Ponzi schemes promise high returns with little risk by paying earlier investors with the money from newer investors. Eventually, the scheme collapses when there aren't enough new investors. Any advice offering high-returns in no time, should approach with caution.
How to escape from Ponzi schemes:
- Research Promises: Be wary of investments that guarantee high returns with little risk.
- Check Credentials: Verify the investment through independent sources and regulatory filings.
6. Account Takeover Fraud
Hackers gaining access to your trading account.
Fraudsters can hack into your online trading account, steal your identity, and make unauthorized trades.
How to protect yourself from information theft:
- Use Strong Passwords: Implement strong, unique passwords and change them regularly.
- Two-Factor Authentication: Enable two-factor authentication for added security.
- Keep secrecy: Never ever share your critical account information such as account details, passwords, OTP etc. to anyone.
7. Fake News and Rumors
Making trading decisions based on false information.
Scammers spread fake news or rumors to manipulate stock prices. Traders who act on this misinformation can suffer substantial losses.
How to avoid false information trap:
- Verify Sources: Check the credibility of news sources before acting on any information.
- Stay Informed: Follow trusted financial news outlets and verify news through multiple sources.
- Only Trust Authentic Sources: Investors have options to verify the received news and information through stock exchange websites and other authentic places.
8. Front Running
Brokers trading ahead of their clients.
Front running is when brokers buy or sell stocks for their own account before executing orders for their clients, benefiting from the price movement caused by the clients' orders.
How to avoid the front running trap?:
- Choose Reputable Brokers: Use well-known and reputable brokerage firms.
- Monitor Transactions: Regularly review your transaction history for any suspicious activity.
9. Excessive Trading
Brokers encouraging frequent trades to generate commissions.
Some brokers may push clients to trade excessively, a practice known as churning, to earn higher commissions, regardless of the clients' best interests.
How to avoid excessive trading traps?:
- Understand Fees: Be aware of the fee structure and how it impacts your returns.
- Long-Term Strategy: Focus on long-term investment strategies rather than frequent trading.
- Never Take Advises Blindly: This would help investors to research and take right trading/investing decisions.
10. Impersonation Scams
Scammers posing as legitimate brokers or investment advisors.
Fraudsters may impersonate brokers or advisors to gain your trust and convince you to invest in fraudulent schemes.
How to avoid impersonation scams:
- Verify Identities: Always verify the identity and credentials of brokers and advisors.
- Check Regulatory Status: Confirm that the broker or advisor is registered with regulatory bodies like FINRA or the SEC.
- Avoid Engagement: Strictly avoid engaging with calls and advices from straingers and from places and people are unknown.
Conclusion
The stock market offers significant opportunities for wealth creation, but it's also a hunting ground for scammers. By being aware of these common traps and taking proactive steps to safeguard your investments, you can protect yourself from fraud and make informed decisions.
Always conduct thorough research, use reputable brokers, and stay vigilant to avoid falling victim to these deceptive practices.
