Six Basic Thieves of the Stock Market
First things, first!
1. You have money. Other people want it. All of it!
2. You want easy money. So does everybody else. They'll get it, too....yours! (and all of it!)
3. You tell yourself you're smart. You won't lose your money. Fact: Other people are smarter, and they'll still get your money (and all of it!).
4. People KILL for money. Lying to you, for your's, is cakework.
5. Re-read the first four caveats again! Read them so many times, you can recite them while passed out drunk! They are THAT important!
So, you have a few dollars and want to 'make your money work for you'. Good. Realize you are not alone, and obviously, not everyone makes money in the stock market (at least not all the time). Will you be who I make money from? Hopefully not. Will I be who YOU make money from? Not likely, unless you learn the basics first.
In the stock market, there are six basic 'thieves' who'll
your money right from in front of you:
The selling of newly issued shares. The basis in which the entire stock market revolves around is the issuance of shares to acquire the capital to sustain and allow a company to grow. This is arguably the worst of the six 'thieves', as it is 100% legal, even when done with 'less than good' intentions and done thru misrepresentation. The less 'blue chip' a company is, the more likely the dilution will not bear fruit.
Enter the 'lifestyle' stock.
Lifestyle stocks (and they are VERY plenty, especially in Pinksheet issues) are stocks with good/great sounding stories, usually in the form of press releases. First and foremost, they provide CEO's with high salaries, regardless of CEO performance. They also provide the company with capital to support their own lives, using such guises as travel, meals, and entertainment as expenses. Automotive (BMW, Mercedes...you get the idea) expenses are common. Real-estate also falls into the classification as a company necessity, 'stated' as a necessity for temporary housing for out-of-town clients, even if the 'client' may be a high school sweetheart from a different city. Shortly put, watch CAREFULLY and CLOSELY for lifestyle stocks. You can only profit from them once you are FULLY knowledgeable in their 'scam'.
Dilution is inevitable in all companies, given it's nature and value to a company. A 'good' company dilutes minimally, and gives shareholders 'value for their money', ie; increasing/improving bottom line fundamentals.
It is HIGHLY advised to locate the Transfer Agent (TA) of any company you wish to be invested in for more than 1 week. By frequently calling the TA, you can gain a necessary understanding to what extent the company is diluting. TA's can give you the outstanding shares (o/s) for any date you ask. By knowing the o/s on the first of the last 3 months, gives a good idea of dilution rate.
Stay far away from an issue that the TA has been gagged, at least until you have become VERY experienced in investing/trading. There is virtually NO good reason for a TA to be gagged. None.
This is a device used more by Market Makers (MMs) than others, but by no means, limited to them alone.
MMs rank right behind bankers, lawyers, politicians, and many CEOs.
They have the ability to create what appears to be volume and increase in pps (price per share), giving the false impression that a stock is going up in value. What is to be closely watched for is whether it is a sustained increase in pps, or only temporary.
They have the ability to 'over accentuate' a 'run' giving the impression the issue is going up quickly. Often, they will naked short shares at the HOD (high of day) only to buy them back (from you) on the retrace. They understand terms like 'weak hands', 'panic', 'fear', and have no qualms of using their skills to make themselves more money at your expense.
No one makes more money in the stock market, than MMs. Usually, it's YOUR money, they make!
MMs have an arsenal of tricks they use, of which would be impossible to outline them all. Other common ones are signals. Often, they will use 100 share trades to take a pps up or down, depending on what their desire is. If they have shares they want to sell, they will try to 'take it up', giving the appearance of a pps going up in value. Conversely, when they need shares, they 'take the pps down', on 100 share trades, hoping to 'shake weak hands' loose of their shares with the fear of a plummeting pps.
Another form of manipulation is performed by unscrupulous investors or investment bankers, usually by 'bidwhacking' a pps down, so as to buy more shares at lower prices, whether on the open market or thru private placements. (A private placement is when a company sells shares directly to an investor, as opposed to the open market).
Newsletters, Spam, Advertising - all forms intended to put the company in a positive light, regardless whether the company is worth the paper they are printing new shares on. Paid promo NEVER tells bad things. Also, since they are often paid with free trading (as opposed to restricted) company shares, these new company shares are often dumped quickly, thereby driving the pps down unless enough market demand can soak them up. Exercise extreme caution when interested in an issue you learned about, by way of these forms of media.
Volumes could be written on this, as this is the greatest method of selling shares, and often, new shares. Misrepresentation occurs by both company and shareholder.
Companies are famous for outlandish projections, giving investors hopes of great rewards. Usually, it is better to put these companies on the watchlist, as opposed to buying because of projections. 'Show me the money' applies in full.
Shareholders are also famous for misrepresentation, sometimes even, so they can close out on a losing position at a half way decent pps....and at your expense.
Pump & Dump:
Many stockboards are loaded with fellow investors who are anxious to see their investments go up in value. Everybody wants you to buy into the same company as themselves. Even I do. Choosing good stocks however, should never be done on the grounds of what people 'say', or what you 'heard' (at least not until they've proved themselves). Nothing will ever replace DD (due diligence). It's YOUR money. If you don't invest it wisely, it might end up being MY money. (j/k)
The typical 'pump & dumper' is a person who frontloads (buys in advance), then alerts with great excitement about "MAJOR GAINS!!!", or "Ready to blast off", or "To da Moon", or "900lb Gorilla on steroids". Anyone who uses these ploys should be highly suspect and also frowned upon.
Intelligent investors invest intelligently, and make money. Those who fall for this hype deserve to lose their investments, when the 'pumper', quickly turns to 'dumper', selling you the shares he just made 50%, 100%, or 1000% on!
Short Selling, Naked Short Selling (NSS):
Short selling is done with actual shares that legally exist in certificate. This practice is usually done when a stock is considered overvalued, and a 'short' expects the pps (price per share) to decline. The short is borrowing someone's shares (possibly even yours) at whatever price, from a broker who has such shares, sells them to the market, and after the price has declined, the shorter buys them back (cover's), pays the broker back, and keeps the excess, as profit.
Naked Short Selling (NSS) is done with shares that do NOT exist, in no form whatsoever, and is done only by Market Makers (MMs). This is very comparable to counterfeiting, except without the need to even have printers. Because naked shorted shares do not exist in any form whatsoever, they cannot even be traced by the SEC. It is also a form of dilution, and in the broadest sense, compounded dilution at it's worst, and furthermore, not even on anyone's books.
Naked short selling was created (by the SEC, no less) to allow MMs to 'maintain an orderly market', though it's intention has been ridiculously abused (by MMs) to the point of criminality. Worse yet, due to 'loopholes' in the laws that MMs are able to circumvent, rarely does prosecution/penalties ever occur.
*Note: This is only a brief outline of NSS, as is much of the rest of the information on this board. Nonetheless, all that is discussed here is to bring general awareness to the 'machinery' of the marketplace.
More on Market Makers: http://www.investorshub.com/boards/read_msg.asp?message_id=15625415
Naked Short Reform petition form:
It's your money. Once you've lost some of it to the MMs, you might be more receptive and/or disposed to completing this form and sending it in.
About The Author
"Lowman" is a successful penny stock trader/investor on iHub, a popular stock message board. With over 600 Member Marks, he has earned his reputation by uncovering some true gems in domestic energy stocks. Click here to see Lowman's iHub profile, and check out what energy stocks he's trading today! Also check out his Money 101 Board for much more investing information.