Blog #15 - How To Know If There Is Going To Be a Scam In The Stock Market?

 

How Scams In Share Market Can Be Anticipated?

 

 

The traders and the investors who have been in the stock market since long time have had to face a scam at some time or another. If you belong to 1990s then you should aware of Harshad Mehta and Ketan Parikh scam. Actually it is wrong to categorize them as stock market scam because the scams were in financial institutions. In both the cases, Harshad Mehta and Ketan Parikh, financial institutions violated the RBI (Reserve Bank of India) guidelines to lend money to both these gentlemen which they used to inflate stock market.

 

Now the question arises how a scam can be anticipated or how a trader / investor can know about a scam is going to happen. The question is very interesting because everyone wants to anticipate the cause to scam. In my opinion the most of the traders / investors who follows charts would not get badly hurt because they had stoploss in the place. Further if you are avid trader or investor who regularly monitors the activities of share market then you can easily find or trace the irregularities, because in share market price of stock cannot change abruptly and increase continuously without any cause or the performance of the company. Cartels are always present almost in every sector, cartels are group and you cannot identify them because it may be anyone, group of brokers or financial service providers etc. Generally cartels target penny shares because it is easy to manipulate penny stocks and also penny share attracts mostly retail investors and you know the reason. 

 

Scams can be predicted

 

 

 

Nimble traders even made profit by selling short in the ensuing market. One of the indicators for the scam is a big bull run. I called Bull Run as an indicator because if you go through the history of the share market you will find that the most of the Bull Run ends with the scam. “Here I am saying “most” and not all”. The key to recognize the scam is to watch when market starts acting silly in paying valuations the company. A chart plays a crucial role in this case as they give indications of market topping out. At this stage I would like to recall the great Bull Run of the US market in 1990s where it ends with the WorldCom and Enron. Many people are so secured to assets that they overreact to scam and very emotionally.

 

Scam : Illustration

 

If we talk about the market, after the ten years of reforms, they are probably most safe and among these Indian share markets are the safest because the VAR (Value at Risk) system of margins on the derivatives collects up to 50% of the total value of a transaction when market becomes volatile. Thus the chances of default by any of the exchanges or brokers are minimal. The key regulator of Indian share market SEBI (Securities and Exchange Board of India) is powerful and is very vigilant to the manipulations by any market player.

 

Point to be noted:

Every investor or trader knows that insiders and manipulators are present in the market. At this stage I would like to point out that the activities by them are clearly visible on chart. It is my strong urge to develop a feeling for charting because it can help you save a lot o grief in share markets.

There has been a consolidation of regional exchanges and now there are only two major exchanges in India BSE (Bombay Stock Exchange) and NSE (National Security Exchange) which entirely runs the business of equities. So the risk of scam is minimized.

 

Reminder:

It should not be considered as suggestion / recommendation.