Trap 5. ‘A Stock Will Gain Soon Based On Insider Info’

India is witnessing an unprecedented surge in equity market participation with the stock market also scaling new heights. This trend is clearly reflected in the increasing number of demat accounts. July 2024 saw the highest number of new demat accounts opened in the past six months, with over 4.55 million additions. The total number of demat accounts now stands at nearly 167 million, as on July 31, 2024.

But what should be worrisome is the simultaneous increase in equity market frauds. This is evidenced by the fact that the stock exchanges have started issuing caution about various frauds almost thrice a week.

One of the most prevalent scams is the “pump and dump” scheme. Here, fraudsters use social media channels to lure investors by claiming to have insider information about a company. They suggest that a particular stock is likely to gain in the near term, and entice investors with promises of high returns over a short period of time. Gullible investors start buying these stocks, which results in rise in the price of the stock. The fraudsters then sell them and book their profit.

If someone claims to have insider information on a particular stock, treat it as a red flag. Insider information refers to non-public knowledge about a company that could influence its stock price. Using or acting on such information is not only unethical, but also illegal. Insider information is confidential and, if made public, could affect the company’s stock price. This might include details about upcoming mergers and acquisitions, financial results before they are released, or some changes in the management.

As such, always exercise caution when someone claims to have exclusive insider information. If you encounter such claims, report them to the capital markets regulator, the Securities and Exchange Board Of India (Sebi), or the stock exchanges or the demat service provider rather than falling victim to these fraudsters. By staying informed and vigilant, you can help safeguard your investments and contribute to a more transparent and trustworthy market environment.