How to Avoid Stock Market Fraud
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The stock market can be a truly complicated experience for beginners or even intermediate investors and subsequently, it can be overwhelming. Gaining a complete functional understating of the market requires years of knowledge and experience. Therefore, not many people are familiar with how the market really operates and subsequently, they can become victims of stock market fraud. Due to the secluded nature of the stock market, there is some suspicion associated with it and we gave a listing of the worst stock market investor scams in a previous article. The limited knowledge of stock market forces those interested in investing in stocks to do so through brokers and agents, which could be a good or bad, depending upon the information the investor is being advised about.
The basic motive of anyone who trades on a stock market is to get rich quickly and while pursuing this unrealistic approach, many people would fall prey to the dark side of investing AKA market fraud. Of course, new entrants are at a greater risk of such scams, there have been cases where even the most experienced traders have not been able to gauge these fraudulent activities.
Given the digitization of the financial sector, stocks are no longer traded exclusively on the market but are traded through cell phones and laptops as well. Millions of people across the world buy and sell stocks at the click of the of a mouse. This amazing technology has not only benefited global stock markets but has also given rise to some unique and creative cons.
Below are a few ways stock investors can protect themselves from stock market scams.
Do Proper Research
Whether you have received stock advice from a family member, a friend or a website that apparently seems credible, it’s best to conduct proper research about the concerned stocks. Usually, fraudulent stock tenders consist of offers that promise an investor to generate bigger profits in the least time. Since everyone wants easy money, they will surely fall prey to such schemes. It is therefore suggested to thoroughly research such stock offerings.
Some of the important things to do when researching are to verify if the company has been in business for at least more than three years and evaluate the company’s financial statements yourself or through a professional service.
Take your Time
It is reasonable for an investor to take some time before buying or selling a stock. The investor must utilize this time in further analyzing their research and also keeping a check on the changing market trends. It is also advised to keep tab on any news related to the concerned stock.
Discuss the Investment
The stock buyer can also ask the person offering the trade about the viability of the stock and raise whatever concerns they should have. It is important to note the kind of attitude a negotiator maintains during these sessions. If they seem confused or become irrational when asked multiple queries, it should be taken as a warning sign. Such a company is probably dealing with a potential scam as they aren’t able to satisfy all your reservations.
Be Wary About Your Broker
People who don’t know much about the stock market and prefer investing through brokers. The main reason for trading through agents is not only the limited knowledge of the market but also it is a hassle to keep a check on the trends yourself. Such people who trade blindly through brokers mostly become victims of stock frauds.
There are thousands of brokers working in the stock markets; therefore, it's quite challenging to determine your broker’s reputation. The easiest way of verifying your agent is by surveying about them in the market. Online searches can also provide a much detailed history of the particular stock agent and records of any past discrepancies. However, if the concerned broker doesn’t have any substantial past record then it is better to avoid trading through them.
An alternative would be to research and build your own portfolio and avoid broker advice altogether. You can start building your stock portfolio through the use of dividend reinvestment plans (DRIP). Virtually all major corporations have these plans and you can purchase shares right from them, saving brokers fees or you can purchase through a broker, but without the broker interjecting any suggestions or advice.
Start small and if you see this is working for you, keep going. Especially if you are young, you will see your portfolio grow!
Diversify Your Portfolio
As they say to never put all your eggs in one basket, similarly it is always a bad idea to invest all of your money in a single stock. Investors, whether new or veterans are all advised to diversify their investment and stock portfolios. The greater the diversification, the lower are the chances of entailing higher losses in case of fraud. It is suggested to invest the lowest in risky stocks that generate consistently higher returns as they are at a greater chance of being scammed.
Additional diversification would be to purchase balanced funds, bonds, and precious metals. It is also suggested to keep a percentage of liquid cash on hand in case of emergency.
Given the highly speculative nature of stock markets and the several cases of stock market fraud in the recent past, it is always recommended to invest cautiously while staying vigilant about your assets. Remember Bernard Madoff!
Just be Smart and Vigilant
All these suggestions above still carry risk, but the more balanced your portfolio is, the less chance of losing all your money through either scams or market crashes or something else.
Posted On December 31, 2017