Everyone wants to get rich overnight but that is next to impossible unless you strike gold by being on the right side of the trade on the right day. However, the stock market is an excellent place to get poorer if you are the victim of a scam. It is essential to be vigilant when you are in the stock market to avoid being exploited by fraudsters. Let us explore some tips that may be useful in avoiding some of the obvious tricks used by them to defraud innocent traders who won’t know what went wrong.

Beware of schemes that promise you very high returns: It is nearly impossible to generate extraordinary returns compared to historical yields. If any advisor promises this, it is better to avoid falling into the trap. Don’t fall for every get-rich scheme that is advertised on the internet. It is designed to trap newcomers to the stock market.

Don’t be trapped by Webinars/PMS: A lot of stock market advisors are out there on social media waiting to sell their webinars and portfolio management schemes to newcomers. There are no guaranteed returns in the stock market. It is important to be sure of the credentials and past performance of these people before paying them any fees.

Don’t take undue risks: Every trade in the stock market is fraught with risk. It is important to be aware of the extent of loss that is possible before acting on anyone’s advice. Traders should use prudence and apply a Stop Loss no matter where the advice or tip comes from. This will help you limit your losses.

Never share your trading account credentials: Never share your trading account details with anyone even if he/she promises profits. It is highly likely that they may buy high and sell low in your account while they make profits in their accounts by doing the reverse in what is known as circular trading.

Set up a Two-Factor Authentication: A two-factor authentication via PIN or OTP will add an extra layer of safety to your account. This will ensure that nobody can hack into your account or place trades on your behalf.

Educate yourself: Before you enter the stock market, it is advisable to read up on the basics and understand how the market works, the entire cost of a transaction, the tax impact, etc. It is prudent to learn how to read the market action, understand charts and practise paper trading before committing your money.

Don’t trade in illiquid stocks: Never trade in illiquid stocks, especially on someone’s advice. They may be trying to drive the price up while selling you a long-term growth story. Chances are high that they will offload the stock at higher prices while you will be left holding an expensive stock that may remain locked in a lower circuit for days. This is a very popular method of scamming newcomers in small and micro-cap stocks which have very little liquidity. Do your own research if you are entering any such trades because exit may not be easy unless you are on time.

Avoid shortcuts

The secret to safe trading in the stock market is to remain aware and vigilant at all times. It is best not to enter trades based on tips and to follow one’s own view about the market or stock direction. Buy-and-hold trades in good quality stocks are safe as you can make profits over a period of time. In the case of intraday trades, it is important to get the direction and entry point right. It is trickier when it comes to futures and options trading as they come with an expiry date.

Make sure you get the right mentor or advisor who can teach you to manage risk both on and off the market. Avoid manipulated counters with low liquidity since you may get stuck at higher prices if your entry is incorrect. Sticking to quality stocks that are highly liquid is the safest way to trade in the stock market. It is best to start with the cash segment before you try your luck in the derivatives segment.

Avoid paying money to social media advisors who can suck you into their Webinar and Portfolio Management Schemes. Remember, the stock market is never a zero-risk game, so it is imperative that you know what you are getting yourself into. Past performance is not a guarantee for future returns, so it is important to make sure you know your risk and reward.

The author is Founder & CEO, Alice Blue