The nuisance of unsolicited and deceptive stock tip SMS messages has reached epic proportions in the past few years. A lot of unwitting investors have invested and lost their hard earned money.
This is how a typical pump and dump scheme works. An operator or operators buy into a stock well in advance and start sending out messages to increase the share price. Once the price has gone up they dump the stock and leave unwitting investors who didn’t know any better in the lurch.
These schemes can range anywhere from a few days to a few months.
In a bid to raise awareness about these messages we decided to analyse some of these companies of which we have received messages dating back to about a year. The numbers are astounding. Some of these stocks have fallen by over 50%. This is during the period when the Indian markets have been on a spectacular bull run.
|Stock||Date||Price on the date of SMS||CMP||Performance (%)|
|SUNSTAR REALTY DEVELOPMENT LTD||01-03-2018||16.5||9.39||-43%|
|FUNNY SOFTWARE LTD||9/29/2017||13.9||8.46||-39%|
|DWEKAM INDUSTRIES (Danube)||7/24/2017||3.05||3.57||17%|
Typically operators pick targets where there is very little liquidity and extremely poor fundamentals because it is easier to jack up prices in such scrips. And in 99% of the cases, these stocks trade on BSE. Here are the financials of Funny Software Ltd which is making the rounds. A whole lot of Zeros and yet the stock is trading at a PE of 933.
|Profit before tax||0.03||0.04|
Liquidity is one of the biggest risks in such stocks. An operator pushes the stock prices up by circulating messages. Once a stock has moved up he starts dumping his shares which causes the stock to fall. When the stock prices start falling more sellers pile on creating a vicious circle. Good stocks have enough liquidity to absorb such selling pressure in most cases. But most of these stocks have very small circuit limits ranging between 2-5% and when the operators dump stocks these stocks hit lower circuits for weeks and in some cases months together. When a stock hits a lower circuit there are no fresh buyers. All that small investors can do is to watch while the value of their investments goes down.
We have seen a lot of newbies and people who aren’t very market savvy falling for these tips and risking their money. We have been raising this issue with the regulators and at numerous brokers forums and hope that some action is taken. But in the meanwhile, investors must remain vigilant and avoid falling for such obvious traps. There are enough resources online including a couple of educational initiatives we run where people can educate themselves about the markets. It is always advisable to have at the least a working knowledge of the markets before putting in money.
If you are a beginner in the markets it is always better and safer to start investing in mutual funds. Once you have enough understanding of how the markets work, you can dabble in equities. The markets provide enough opportunities to make money on fundamentally sound stocks.
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