The World Wide Web
About 99% of my stock and bond transactions are done on the internet. But don’t think that I am not careful who I use as my online broker. Since I was in my early 20s, I ran into some character brokers as well as brokerage firms in my day. In the day of cyberspace and media hype, people have to be very much alert as to what is going on behind the internet curtain.
You probably remember the media hype behind “Facebook.” They talked about this company going public for almost a year. The week of May 14th, all news networks on all the major stations and the financial news stations on cable talked about it like the world had no other news. By the day it was to open, that was all the news people talked about, like the world’s future depended on this company. They suggested that this stock was going to go up and that the people who got in on the ground floor were going to be rich. The news people gave others the idea that if you are not in on this good thing, you are going to miss the boat.
The stock opened on Friday May18, 2012 at $42.05 and collapsed from there and so did the volume on the stock. By the morning of May 22, 2012, the media was asking, “what happened? “ The answer was simple; the public did not buy into the media hype. They were burned in the market down turns of 1989, 1999, and 2008. They were burned in the housing and internet stock bubbles. The insiders who bought the stock before Facebook became public got a big surprise. These insiders thought they were going to dump the stock on the unsuspecting public but they found that they had no buyers. By the opening on May 22, 2012, it was every insider for themselves to get what they could out of the current stock price. At 10:00 AM the price stood at $30.98.
When I first started investing in the markets in the 1970s, it was illegal and unethical for the major media to advertise a company’s stock on TV. Today, they participated in this Facebook “Pump and Dump” scheme. “Pump and Dump” schemes are run mainly by unscrupulous companies, market making brokerage or large shareholders. The goal is to interest unwary investors, who then drive up the stock price through a buying surge. The schemers stand to make substantial profits when they sell their cheap shares. After the price collapse, talk of the company ceases and the schemers move on, hyping a new stock.
This type of thing goes on in cyberspace all the time. I wish I had a dollar for every email I received about a hot stock to buy to make me rich. As the internet gets more popular so will fraud using the internet as its tool.
Beware and be realistic when it comes to the Internet.
1. Don’t expect to get rich quickly. That mess only happens in the movies. If you can trade in nanoseconds on the internet successfully, then you may have a good chance of striking it rich just like I have a good chance of becoming the King of England.
2. Don’t assume your investment bulletin board is policed. Nothing prevents a con artist from posting stock tips for a swindle. Only if people start complaining about something on the board does the cyberspace police do anything about it.
3. Don’t buy thinly traded, little-known stocks on the basis of online hype. These are stocks that are most susceptible to manipulation. With low volume, market makers and other interested parties can make the stock go up as well as down. “Penny Stocks are good scam targets.”
4. Don’t act on the advice of a person who hides there identity. They can be people with an interest in getting you to buy or sell a stock for their own interest. These people might be undisclosed brokers, investors, or company insider’s intent on driving the stock price in their direction by using false or baseless speculation that is difficult or impossible to disprove. Don’t assume that two or more people talking up a stock are different people.
5. Don’t get suckered by claims about “Inside information.” It is extremely unlikely that genuine insider information will be broadcast on an investment bulletin board. Federal insider-trading laws prohibit such practices.
6. Don’t assume that all claims have been proved by information or visits. People who hype stocks make all kinds of claims that they say are backed up by visiting the company. Most of the time they don’t tell you who it is that is making the claims. In the case of Facebook, the media claims that Facebook is going to make a lot of money because of who they are. By the time Facebook became public, these claims were not realized. So the market trades are based on speculation of what Facebook may earn in future years. Here is the reason for the stock drop.
7. Don’t forget to look for potential conflict of interest. A growing number of online stock analysts receive cash or shares in exchange for a glowing comment about the company in question. Federal Law requires analyst to disclose this fact but some make little effort to do so.
8. Check out your investment opportunity first with your state or federal securities commission. In Pennsylvania this would be the Pennsylvania Securities Commission (1-800-600-0007). If you are in another state, check the internet for information for your state or contact the Federal Securities and Exchange Commission. www.sec.gov
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