Luring investors into ‘pump-and-dump’ using social media

Earlier, fraudsters used to artificially inflate stock price through word-of-mouth propaganda; they now peddle fake advice through the internet
Image used for representational purpose only.
Image used for representational purpose only.

MUMBAI: The recent crackdown of the Securities and Exchange Board of India (Sebi) on some YouTube channels and individuals has once again brought the issue of fooling retail investors to the fore. It was a classic case of pump-and-dump, where retail investors lost money due to share price manipulation.

Last week, Sebi barred 45 entities from the securities market for manipulating share prices of two companies through uploading misleading videos on YouTube channels. The cases were related to recommending investors to buy the shares of Sadhna Broadcast Ltd and Sharpline Broadcast.

What is a pump-and-dump scheme
This is not the first time when retail investors were tricked into the pump-and-dump scheme. In this old and time-tested trick, some individuals spread false information about a company in which they already have made a significant investment. Claiming to be an expert or privy to some insider information about the company, the so-called expert lures investors to buy shares of the firm. This is done via popular social media platforms like YouTube, Instagram and others.

Falling prey to such claims, investors buy shares that in turn fuel rally in the price of stocks. Once the share prices rise, manipulators book profit by selling (dumping) their investments in the firm, leading to a crash in the shares, leaving retail investors high and dry.

Express illustration
Express illustration

How to spot stock manipulators
The growing popularity of social media has led to rise of ‘finfluencers’, a word coined for financial influencers. They offer advice on financial topics like stock trading, personal finance and mutual funds. It is not easy to distinguish between a genuine expert and a stock manipulator but experts say there are certain characteristics retail investors should look out for to spot a fraudster.

“Pump-and-dump is not a new phenomenon, earlier it was done through word-of-mouth, now social media is used to peddle fake advice. If someone is claiming a success rate of 80-90% for his investment strategy, then investors need to be alert. In the current circumstances, the general rule for retail investors is to ‘be sceptical, not greedy’,” Tejas Khoday, co-founder and CEO of Fyers, a broking-tech platform, told this newspaper. If someone promises unrealistic returns or guaranteed money back, it should ring alarm bells for investors. There are some words that investors should know to identify stock manipulators.

“Use of aggressive words like buy now, tip, double your money, earn crores etc should raise a red flag. In stock markets, nobody can guarantee returns, if such claims are made, investors should be cautious. One should look for a proper corporate structure of the entity and should be cautious if there is no legal structure of the entity,” said Divam Sharma, founder at Green Portfolio PMS. “If the entity is not a Sebi-registered alternative investment fund, portfolio management service, mutual fund, or any such regulated fund, one should not give the credit of funds to other bank accounts to manage.

An unregulated advisor asking for your funds to be credited to his account is illegal,” he added. Also, investors should not equate popularity with expertise. “One must understand that popularity alone is not synonymous with expertise. Several money managers have an established track record of high credibility but may not be popular. At the same time, many popular ones may not necessarily be masters of their craft,” said Nirav Karkera, head of research, Fisdom.

Finding the genuine advice
While the Internet is flooded with ‘free advice’, it is challenging to find a genuine expert whose focus is to educate viewers and not to lure them into some shady scheme. “Sebi registration is very important. One can cross-verify the registration details on Sebi website. One can validate the genuineness of the advisor by cross-validating the presence and reviews on other social media platforms or search.

Rather than simply going by promises, one should understand the investment philosophy, possibility of such promised returns, track record and qualification of the advisor. One should understand the disclaimers on personal holdings of the social media advisor,” added Divam Sharma. Retail investors can protect themselves from manipulators by doing bit of research about firms and it is neither time-consuming nor complex. Internet has all the answers and information needed to make right investment decisions.

“Internet is full of useful information and investors can use them to find investment-worthy companies. Investors should look for trend in profit of a company in the past few years, the level of debt on the company’s balance sheet, and some basic ratios like price-to-earnings and price-to-book ratios. By doing a little bit of research, retail investors will be able to find investment-worthy companies,” said Khoday.

How to spot stock manipulation

  • Claiming a high success rate of 80-90% for investment strategy
  • No or improper description of YouTube channel
  • Giving a very high target price for a share in short duration
  • Use of terms such as buy now, earn crores, double your money
  • Promising guaranteed returns on investment
  • Claiming to have a tip or insider information about a company

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The New Indian Express