Investing in stocks? Dump social media, seek advice from regulated entities

Relying on social media platforms puts you at risk of falling prey to pump-and-dump schemes

The Securities and Exchange Board of India (Sebi) recently uncovered a scheme involving 31 entities who allegedly conspired to ‘pump-and-dump’ stocks. By spreading false information through YouTube channels, the manipulators were able to artificially inflate the prices of two micro-cap firms, Sadhna Broadcast and Sharpline Broadcast, only to sell their holdings at a profit once prices had risen.

Modus operandi

The individual or group behind such a scheme initiates it by purchasing a large quantity of stocks in a relatively unknown company trading at a low price. These insiders then collaborate to create artificial hype and interest in that stock. “To do this, they send out false information and spread rumours about the company,” says Shrey Jain, founder and chief executive officer (CEO), SAS Online. Sometimes, they even claim to possess insider information not available in the public domain.

Such misinformation is usually spread through apps like Telegram, WhatsApp and platforms like Reddit, Instagram and Facebook.

“All this buzz piques the interest of other investors, who purchase the stock, thereby driving its price higher,” says Jain.

After the stock price reaches a desirable level, those running the scheme exit at a profit. Says S K Hozefa, CEO, Tradeplus: “As a consequence of their actions, the stock price plummets, causing significant losses to other investors.”

Role of finfluencers

Increasingly, the core group orchestrating the scheme nowadays collaborates with entities called ‘finfluencers’, or financial influencers. These individuals use social media platforms to offer advice on topics such as stock trading, mutual funds, and personal finance. Says Hozefa: “While many of them may be legitimate experts, some also participate in stock manipulation. These unethical finfluencers leverage their reputation and sizable follower base to deceive unsuspecting investors.”

They send out buy calls (for the stocks being pumped by the promoters) on their YouTube channel, or on WhatsApp and Telegram groups, to get their followers to buy them.

Driven by greed

Investors, too, must share the blame. “The fraudsters basically prey on people’s desire to make a quick buck,” says Hozefa.

Investors also give in when fraudsters appeal to their fear of missing out (FOMO). “They urge members to buy quickly before the price goes up. Alternatively, they warn members that they will miss out on a big opportunity if they don’t act fast,” says Hozefa.

Tell-tale signs

Pump-and-dump schemes carry a few tell-tale signs that investors should watch out for. “Sudden and rapid price increases, high trading volumes, unsolicited investment advice, limited or unclear information, stock promotion through online ads and emails are some of the signs of a stock being manipulated,” says Jain.

Gautam Kalia, senior vice president and head–super investors, Sharekhan by BNP Paribas, says investors should be wary of any scheme that appeals to their greed, instead of encouraging them to do research and take an informed decision.

What should you do?

Most such schemes target illiquid stocks, whose prices are easier to manipulate. Stay away from them unless you are convinced about their fundamentals.

Also beware of entities giving advice that don’t have a proper corporate or legal structure. Avoid taking investment advice from social media. “The internet is filled with free advice, but it is hard to distinguish between genuine experts and scamsters,” says Hozefa.

Receive advice from regulated entities only. “India has a highly robust and well-regulated infrastructure in place for offering investment advice. Seek advice from such credible sources,” says Kalia. He adds that even if the advice from such sources turns out to be wrong at times, it will usually not be manipulative, because such entities will fear the regulatory consequences.

Established brokerage houses, for instance, invest heavily in providing quality research. Consult their reports to learn more about the fundamentals of the stocks you are interested in.

You may also seek advice from Sebi-registered investment advisors (RIAs), whose names are available on Sebi’s website.

Before investing directly in stocks, do some research on the prospects of the business, management quality and valuations. “Check company financials like earnings growth, debt levels, etc as well,” adds Jain.

How to spot a potential pump-and-dump scheme

· The fundamental rule is: If any scheme appears too good to be true, it probably is

· Beware of people who claim their investment strategies have a success rate of 80-90 per cent, or who promise guaranteed returns

· Steer clear of YouTube channels where the description offers little information about the channel owner, and other anonymous sources of information

· If someone claims that the shares of a company will reach an unrealistically high level within a short period of time, be warned

· Be wary of people who use aggressive language: ‘buy now’, ‘double your money’, or ‘earn in crore’

· Stay away from people who claim to offer insider information or hot tips; remember trading on inside information is illegal