How To Overcome Fraud and Investment Risk
Investment opportunities generate responsibilities, challenges and risks. Besides, the market-induced risks are the unwholesome practices and frauds, which may lead to gargantuan loss of funds and possible profits.
For instance, one investment promoter attempted to get people to invest in a fake coconut plantation in South America, claiming that the investment would yield good interests. Unwary investors may easily be swayed by this proposal.
Also, a student working with a news agency, who had been trading in shares, generated a press release in year 2000 that stated that a company CEO had resigned; and that the company had been forced to restate 1998 and 1999 earnings as losses instead of profits.
This led to the free fall of the stock’s market price (61 per cent loss) in a matter of hours before the stock exchange (Nasdaq) could step in to arrest the situation. Before the young chap was caught, he had made a gain of about $241, 000, while the company had lost over $2 billion.
There are other avenues for deliberate fraudulent practices in stocks and shares investments that investors must be conscious of.
Here, the goal is that investors should not aid weak capital market practitioners. Therefore, proper understanding of possible fraud points will enable checks.
Possible Fraud Areas
Frauds are often perpetrated by trusted persons, who could not resist temptations. Among such ways that is possible are:
•Using Clients’ Funds To Speculate
It is tempting for an operator to temporarily use clients’ funds to trade on short-term basis; and the inability to return the funds in good time may lead to lies and false information about market situations.
•Deliberate Promotion Of Particular Stocks To Generate Attention, Demand
When prices go up, the promoters sell their stocks and then stop promoting the stocks. The prices of such stocks start coming down and investors lose money, only for the promoters to repurchase the stocks at lower prices.
•Blind Trust
Often times, frauds are perpetrated by persons who are well trusted. Due to the inability to resist temptations, it is easy to hide under trust and honesty to commit frauds.
•Gentleman’s Agreement
Most times, this exposes honest market operators to misuse or misappropriate funds as a result of too much temptations that was occasioned by the free hand that was given to them to operate.
•Stockbroker-induced Stock Buys
Here, young and untrained investors are informed of certain stock purchases, or are persuaded to buy particular stocks by a stockbroker knowing fully that such a stock can be described as ‘gone bad’ and the stockbroker, who has it now offload it to an investor who does not know anything about investing.
•Unauthorised sales by a Stockbroker
This is the other side of the point above. With privileged information, a stockbroker, who has the free hand to manage a stock investment portfolio on behalf of an investor, may sell an investor’s stockholding in such a way that he benefits from such sales when the stock price goes up almost immediately the fraudulent sale has been effected.
•Insider Deals
This is the use of sensitive information to an advantage by someone, who is privy (company employees and stockbrokers) to such information. Such information may be such that can make stock price to fall or to rise to the disadvantage of other investors.
•Undocumented Instructions
These are verbal instructions that are prone to denials and arguments. It is possible to capitalise on these verbal instructions to perpetrate frauds by someone with a jaundiced mind.
•Betrayed Confidence
It is possible for a reputable stockbroker, who is entrusted with funds to buy and sell on behalf of investors to suddenly disappear without trace with investors’ funds. This may happen without prior notice, especially if such a market operator is financially insolvent.
•No Clear-cut And Well-defined Relationship
Where an investor fails to clearly define the type of activities he or she wants a stockbroker to handle, it is possible that charges outside the normal are built and passed to investors.
Possible Measures To Be Taken
In situations like these, investors need to take some measures. Among these are:
•Talk to your stockbroker and clarify issues;
•Ensure you understand explanations given to you by your broker especially when starting new stock-broking relationships;
•Know the stocks you want to buy or sell;
•Know the regular charges on stocks trading (buying or selling);
•Receive training (attend seminars, get mentors and/or appoint a consultant) so that you can grow in market knowledge;
•Avoid jumping into trading or speculation. First become an investor by buying to hold for at least a short term;
•Take proper note of what you are told and cross-check these with experienced investors or other stockbrokers;
•If you notice any unfair treatment by a stockbroker, take it up officially by writing either to the company’s head office or by informing the regulatory authority.
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