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Stock markets are centralized exchanges where investors buy and sell ownership (stocks) of various companies. Most stock markets worldwide are highly regulated and involve legal, nationally registered brokers to facilitate the transfer of stock from a seller to a buyer.

Examples of regulated stock exchanges include the US-based NYSE (New York Stock Exchange) and NASDAQ (National Association of Securities Dealers Automated Quotations). Access to the stock market has never been easier, and the barriers to entry continue to fall every year.

However, this ease of access is not without risks. We are all susceptible to various investment scams, so it’s essential to do our due diligence to protect ourselves and our money from stock fraud and scams.

One common question and belief about the stock market is whether it is rigged. The US stock markets are regulated by entities such as the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority), which monitor the stock exchanges and the brokers that facilitate buying and selling stocks. Despite this regulation, fraud and scams still occur.

Some companies intentionally deceive investors or engage in illegal practices, such as ENRON and Valeant Pharmaceuticals. Fraudulent individuals may create ‘too good to be true’ advertisements leading to Ponzi schemes, with Bernie Madoff being a notorious example.

Even regulated online brokers sometimes fail to act in their clients’ best interests, as seen with Robinhood during the early 2022 GameStop debacle. While there are risks in the stock market and people looking to take advantage of investors, the vast majority of brokers and exchanges operate legitimately, ethically, and legally.

Key points 

• Avoid individuals or entities that approach you with phrases like ‘investment opportunity,’ ‘guaranteed return,’ or anything that sounds too good to be true.
• Avoid high-pressure sales tactics and advertisements: If you didn’t seek out the company yourself, it’s best to avoid them.
• Conduct your own due diligence: Trust yourself and consult a registered financial advisor for advice on what to buy and sell.
• Learn the basics: Understand Dow Theory 101 and identify what a bear market and bull market are. Learn about conservative and traditional investing, and invest in proven successful stocks like blue-chip stocks.

Ponzi schemes

A well-known stock fraud scheme is the Ponzi scheme. It involves paying investment profits to old investors with the deposits of new investors. New investors often join based on the advice of another investor who is unknowingly part of the Ponzi scheme. These schemes are successful due to their perceived legitimacy and history of returns. Ponzi schemes eventually fail because there isn’t enough new investor money to keep paying old investors. Keywords associated with Ponzi schemes include ‘guaranteed income,’ ‘offshore investment,’ ‘small, private hedge fund,’ or ‘secret invite-only fund.’

Pump and dump

Pump and dump scams are a persistent form of stock fraud. They involve targeting individuals to buy a stock, often marketed as a ‘multi-bagger’ with promises of high returns. The scammers buy the cheap stock early, promote it to drive up the price, and then sell their positions at a profit, leaving late investors at a loss.

Penny stock scams

Penny stock scams often work in tandem with pump and dump scams. They involve promoting low-priced shares of new companies with promises of massive future returns. Modern penny stock scams frequently use stocks from the OTC markets (Over The Counter) instead of major exchanges like the NYSE. These stocks are often not available from regulated brokers.

Stock broker fraud

Stock broker fraud has decreased with increased regulation but still occurs. A prevalent form is ‘front-running,’ where brokers place orders for themselves before executing client orders. Other unethical practices include encouraging high-frequency day trading by new investors and undisclosed appropriation of dividends.

Boiler room scams

Boiler room scams, popularized by movies like ‘The Wolf of Wall Street,’ involve high-pressure sales tactics to sell overvalued stocks. Modern boiler rooms operate through online forums, social media, emails, and fraudulent websites, making them more sophisticated and widespread.

Signal providers

Signal providers offer subscription services with stock buy or sell recommendations. While appearing beneficial, these providers are often involved in pump and dump schemes, using subscribers to inflate stock prices before selling off their own shares.

If you have lost money due to a scam or fraud in the stock market, there are options to recover your funds. At Refundaroo, we specialize in recovering funds lost to fraudulent activity and stock market scams. Our representatives analyze your case in detail and assign a dedicated caseworker to help recover your money. We have numerous positive reviews and a high success rate in the field.

SEC Rule 10b-5 states that it is unlawful to commit fraud or deceit on anyone. This includes the practices mentioned above, as well as providing false information or omitting relevant information. (See SEC Rule 10b-5)

In the realm of stock market regulation and legality, few terms are as encompassing as manipulation. Stocks are frequently influenced by both large and small entities in mostly legal and ethical ways—this is inherent to the market. However, some forms of stock manipulation are illegal, such as front-running and naked short selling. Naked short selling involves shorting a stock without borrowing the underlying shares.

A notable example is the short interest in GameStop by hedge funds in early 2021, where hedge funds were short 130% of GameStop’s available shares, meaning they had shorted 30% more shares than were actually available.

No, the stock market is not a pyramid scheme. While some fraudsters do run pyramid schemes similar to Ponzi schemes, the stock market itself is not one.

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