Having the necessary funds is essential to the growth and development of all businesses. There are various ways to obtain the required capital. When businesses establish themselves as prominent brands, they prefer to go public and raise money through the public. This process is termed as Initial Public Offerings or IPOs.
IPOs are equally rewarding for many investors. It allows them to participate in the growth of companies and potentially earn handsome returns. Today, one can also make an online IPO application. However, in India, there have been concerns about pump-and-dump schemes that manipulate stock prices and harm innocent retail investors. Let’s delve deeper into the issue and discover the truth behind India’s IPO pump-and-dump scenario.
Understanding the Pump and Dump Scheme
The name ‘Pump & Dump’ gives a fair idea of what this practice might entail. It is a fraudulent practice where individuals or groups create hype around a particular stock, artificially inflating its price through exaggerated claims or fake news. Once the stock price peaks, the fraudsters sell their shares, causing the stock to crash and leaving innocent investors with losses.
Pump and dump schemes are illegal and unethical. Unfortunately, they are prevalent in many parts of the world, including India. These schemes can shake the confidence of retail investors and can be a significant deterrent for the common people who want to participate in the stock market.
India’s IPO Pump and Dump Scenario
The ease of doing business quotient has improved in India. Many new and successful businesses are arising out of the Indian economy. India has seen a surge in IPOs over the past few years, with many companies going public to raise capital and grow their businesses. However, there have been instances where IPOs have been manipulated through pump-and-dump schemes, causing losses to retail investors.
One of the most high-profile cases in recent memory was of Paytm, whose stocks got crushed by over 60-70% since its IPO was listed in November 2021. The stock price jumped for a short span, just after listing, but crashed a few months later, leaving investors with huge losses. Another equally shocking case is related to Zomato’s IPO, after a few months of gains and stability since the IPO was allotted, the stocks started falling drastically. Another interesting example is the IPO of Nykaa in 2021.
These are just a few examples, but there have been many more cases of IPOs being manipulated through pump-and-dump schemes. The sad reality is that retail investors, who are often lured in by the hype and excitement surrounding IPOs, end up losing their hard-earned money.
Reasons behind the pump & dump scheme
Many people wonder why pump-and-dump schemes happen. The short answer is greed and quick gains. Pump-and-dump schemes happen because fraudsters want to make a quick profit at the expense of innocent investors. They create hype around a stock, often through social media, chat groups, or other online forums. Once the stock price has peaked, the fraudsters sell their shares, causing the stock to crash. Retail investors are left holding the bag, often with significant losses.
Tips to avoid pump & dump schemes
The best way to avoid falling for pump-and-dump schemes is to research before investing in any stock, especially IPOs. Here are a few tips to keep in mind.
- Research the company thoroughly
Look at the company’s financials, management, and track record. Check if there are any red flags or concerns that need further investigation.
- Ignore hypes and rumours
Don’t fall for exaggerated claims or fake news. Instead, research and make an informed decision based on facts.
- Be cautious of unsolicited investment advice
Be wary of unsolicited investment advice from strangers on social media, in chat groups, or in other online forums. Instead, do your research and seek advice from trusted sources.
- Don’t chase quick gains
It’s also important to remember that investing in IPOs does not guarantee quick profits or high returns. In fact, many IPOs can be risky and unpredictable, especially for inexperienced investors.
Instead of focusing solely on IPOs, consider diversifying your portfolio by investing in a mix of established companies and emerging startups. This can help minimize risk and maximize potential returns over the long term.
Opening a trading account can be a great way to access a diverse range of investment opportunities and manage your portfolio effectively. You can make informed investment decisions and build a well-rounded investment portfolio that aligns with your financial goals and risk tolerance. So, don’t get lured in by the hype and excitement surrounding IPOs. Instead, take a measured and strategic approach to investing, and leverage the expertise of a trusted brokers to help you navigate the complex world of investing and trading.