Investing Through A Stock Broker? What if it is a Fraud?

Posted on July 21, 2010

By Oviya Govindan:

Would you like to have your favorite Margherita with chunks of it bitten off served to you, while you dole out the currency for the whole of it? Or would you enjoy your Dominoes experience half as much if you had to pay for the divine chocolava cake and find nothing inside when you open it?

What a waiter is to a restaurant is the stock broker to an investor. He is but the bridge between the management and the customer. The Customer pays for the Pizza offered on menu by the management. The waiter is aptly paid for his catalytic help. End of story.

The only reason you wish the services of a waiter in these joints is that you need not exert yourself; after all getting to savor your food without too much effort on your part is the point of dining out isn’t it? But it is when you trust the waiter with your dish, that he enters the picture as a person whose judgment is called upon to suggest the best fare for the customer and to bring it from the kitchens. For all this he is paid a salary, and given a liberal tip. But again, man being man will get greedy for more and wish for that which isn’t his own. And in due course, fare you pay for and sent from the kitchen gets ‘lost in transit’ as it slips down his throat and fills his stomach while you wonder at the meager amount of food you’re being served.

Okay, so the stock broker’s job is much more complicated than the waiter’s. Oh stop the metaphor already. Yeah, so he has to look at companies, their success and failure in the market; judge their policies and take calculated risks on the investor’s money; he could make a jackpot from business acumen and foresight; he should keep track of the supply and demand of the shares and buy and sell appropriately, be on the lookout for government policies and judge the events to come. Quite something there, you say?

In many cases the stock broker is given full freedom to invest the money in different stocks, under the pretext of allowing flexibility. Herein is established a relationship between the investor and the Broker, one built on trust that the Broker is acting with the best interests of the Investor in mind.

The most common form of fraud by a broker is called Churning. The stock broker sells and buys shares just so as to get commission. He makes huge sums of money as commission through excessive trading of the investor’s shares. There might be a very slight profit or the capital will be returned. But in either case, the broker acts not with the best interests of the investor in mind.

Another common form of such trickery is what is called the ‘pump and dump’ scheme. Thinly traded stock of a company is made to appear lucrative with promises of great profit, low risk. Once the buyers queue up for the stock, demand rises and the price of the stock rises. Now the scammer quickly dumps all the shares in the market. With increase in supply, value of the shares now plummets. And with it goes your money.

Most of the ingenious scams that have shocked the economy of country all have few contriving individuals behind them as the master mind. Take the case of Harshad Mehta; he was called the ‘Big Bull’ of the investment business. But he got bank receipts from banks that didn’t require government securities and exploited the other banks which assumed a government backing for the receipts. Money was used to catapult the price of stocks and he made huge profits while millions of investors and banks were conned.

Or consider the relatively recent case of Satyam’s Ramalinga Raju. Profits were inflated over the years with fictitious assets, leading people to believe that the company was doing better than it actually was. Investors lost heavily as they had no better option than to dump the shares soon as the scam was exposed. Many are the cases of scams with investors being led to believe that a company was doing extraordinarily well. Agents of the respective companies, who act as brokers are given lump sum commissions while only the investor stands to loose.

For an economy so young as ours, we have faced several heists in the stock exchange market. The question is will we ever learn the lessons each crash has to offer?

For a start, one must first keep in mind: No Overkill. Seemingly lucrative offers of cheap shares with prospects of high profits and low risk must be viewed with suspicion rather than happy calculations of a huge return on the investment. Careful as one is, the best of us may not realize that a scam is imminent. In such cases, it would be wise to diversify one’s portfolio than invest heavily on one stock and lose a fortune. That way one can be sure that come what may, scams of any magnitude remain as mere hurdles along one’s path. Some would say that the whole stock market is manipulated and everyone is cheated, but stock markets are financial institutions that aid the companies in their undertaking while profiting in the meantime. They are signs of the economic condition of a country. So, with adequate caution, one must make wise investments.

You wouldn’t even trust your sibling with your ice cream; while you do something else would you? Be wise in choosing where to invest your capital in. Invest where your investment will remain safe. Happy Stock Marketing!


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