financial planning 3. - Securities and Exchange Board of India

14. Avoid Investment ScamsThere are a number of investment scams that allure and trap you. Avoid them. A few of themare listed below.Pump and dumpIn a typical “pump and dump”, you receive an e-mail promoting an incredible deal on a stockdescribed as an once-in-a-lifetime investment. What you don’t know is that the person orcompany touting the stock owns a large amount of it. As more and more investors buy shares,the value skyrockets. Once the price hits a peak, the scam artist sells his/her shares and thevalue of the stock plummets. You’re left holding worthless shares.Boiler RoomsThis type of scam begins with an unsolicited phone call to buy shares in a private companythat is about to be listed on a major stock exchange. They will say that once the company goespublic, the value of its shares will skyrocket. The company is usually in a sector that’s in thenews.Ponzi or Pyramid SchemesTypically, investors are allured through ads and emails promising them that they can“make bigmoney working from home” or “turn Rs1000 into Rs 20,000 in just six weeks.”Investors are asked to provide money upfront. Early investors may receive high returns fairlyquickly from “interest cheques”. They’re often so pleased that they invest more money, orrecruit friends and family as new investors. Here’s the catch: The investment doesn’t exist. The“interest cheques” are paid from investors’ own money and the contributions of new investors.The scheme eventually collapses when the number of new investors drops. Ultimately, thepromoters vanish, taking your money with them.ActivityMr Anand Sharma, 58 years, receives a letter from a newly started company inviting him toinvest in the IPO of the newly formed company, promising him a return of 56% (Guaranteed)in the first year with an assurance of steady increase in share prices for the next three years,as the company is setting up a plant in the fast growing bio-technology sector. The companyis managed by qualified professionals. Please advise what precautions Mr Anand Sharmashould take before deciding to invest in the company? Would you be investing in suchcompanies, if you were in his place?23