Introduction
Investing in the stock market is a very competitive market with hundreds of businesses vying for the attention of the customer. In order to win such competition, a business needs to be reliable and its website has to be intuitive and easy to navigate. But with so many online marketplaces providing such services, it’s difficult to distinguish between the good and the bad.
These sites offer very competitive trading services and some offer them at a very low cost. In order to take full advantage of such services, you should ensure that you are trading with a reputable online brokerage. The risk of investing in a dubious online marketplace has often resulted in investors losing their life savings as well as losing a considerable amount of money.
How do you avoid trading scams?
When trading, you will be trading with people from all over the world.
Don’t trust a person from a different part of the world until you get to know them. If you get to know someone, he/she will provide you with insider tips about a stock that will increase your profit. However, most times, people just want to make money by taking advantage of you.
When you read their name on their business card, remember that they will always use a pseudonym.
Ask questions. Question everything.
Do not buy an investment that you do not understand the risk involved.
If the stock that you have purchased starts to lose value, there is a risk that you will lose all of your money. You may also lose some or all of your money when you sell the stocks after trading.
What are some common trading scams?
One of the oldest scams in the market involves the traders of Enron Corp. It is believed that more than half of the shares were never traded due to fraudulent activity. This scam took place about 15 years ago and it continues to this day. According to reports, traders are still picking through Enron shares. Some also warn that the number of people looking for the same shares is dangerously high. These shares can be sold for a profit and yet you may never receive any of the money or have the money spent back on you by the scammer.
When you buy a share, what you are buying is a right to make money when the share goes up in value. However, you only get to keep the difference between the buy and sell price. It is then up to you to sell or hold on to the stock so that you get your full profit.
Ponzi Scam
If a well-known company goes bankrupt and gets taken over by the government, the shareholders are usually entitled to their shares back. But that does not guarantee that you will receive your shares. The government might not pay out or it might take a very long time. However, it is possible that another company will purchase the stock of the bankrupt company and simply buy up all the shares for a fraction of their original value. This is a Ponzi scheme. Because these companies have collapsed, the government is owed all the money and will not give it to the shareholders. This is the true cost of Ponzi schemes and always stay away from them.
In some cases, individuals will attempt to make a quick buck by stealing from others.
Insider Trading Scam
Investing in the stock market is not something that you should be done in a day. And if you are new to trading, you should not make any transactions without knowing the background of your brokerage firm. If you don’t know this, you might end up buying stock shares of companies in which you know people who have some financial interest. Insider trading scams come into effect when there is a friendly, warm relationship between a broker and a trader. Someone who is close to the broker is able to slip them information that they can use to sell shares before the price drops or before the price goes up. You can only lose your investment if you are not in full knowledge of the situation.
Penny Stock Scam
One of the most common scams to come in contact with a new trader is a penny stock scam. New traders are often eager to jump into the stock market without knowing a thing about the business. Penny stocks can bring in a huge profit for some, especially traders with no experience in the business. The problem is that a penny stock may never exist. Many legitimate companies fall into this category and it is usually because the price was made up from fake money. It is important for investors to be cautious before investing in this type of stock. You should always do your research before buying any type of stock.
Internet Bubble Scam
The famous stock market bubble of the late 1990s occurred when the Nasdaq stock index started skyrocketing to extremely high prices at the same time as the economy entered a recession. To those who had amassed large amounts of cash or borrowed large amounts of money to invest, their investments were at risk.
To ease the stress of those investors, various investors started to sell stocks and buy hundreds of worthless options on individual stocks that they claimed would double or triple within a few days. Trading the options, however, only added to the market panic. If the market crashed, some of those who took out insurance policies on their stock investments were on the hook for the losses.
Conclusion
Sometimes, one can come to believe that it is impossible to buy and sell stocks in a legitimate manner, but if you persevere with it, you will soon learn how to beat the system and earn impressive profits. However, in the meantime, ensure you only deal with legitimate online stock market brokers. Many unscrupulous brokers will accept money from new investors without completing the necessary paperwork and then charge them hefty fees. They are not worth it and you are better off dealing with real brokers.