By Joseph Chambers
The Investment Tracker
Kenneth Coleman, editor of the Investment Tracker, and I talk regularly on the subject of the new stock market. I say the new stock market because Wall Street is not what the common market investor understands any longer. Traditional investing is not the only game in town. Honesty left the market in the 1990s with the advent of Internet day trading.
The Internet day traders have taken the calm out of the market and replaced it with manipulation. For day traders, manipulating the market is like a game of chess or war. John R. Emshwiller, a veteran reporter for the Wall Street Journal, refers to these cyber warriors as rich "scam dogs and mo-mo mammas."
Think about a person who has nothing more interesting to do than to financially cripple his enemy, while making a good sum of money doing so. What if I told you thousands of day traders can and are the cause of erratic movements in a particular stock or stocks, especially small and micro cap stocks. There are traders called "pump and dump" traders. They buy a 10-cent stock at 8:00 AM and at 9:30 AM, when the stock reaches 20 cents, they dump it.
The warrior finds a company. For example, it could be a high carb cookie company in the back room of a nail salon. We will call the stock HCC for High-Carb Cookie Co. The warrior buys 500,000 shares of stock at 38 cents at the close of the market. Now the warrior begins his work and markets this company. With his pot of coffee, he is up all night writing and sending e-mails.
The warrior or scam dog hits the Internet bloggers and investor chat rooms. He creates a buzz on the stock and enough investors swallow the swell. The next day investors start moving HCC and the stock moves up to 48 cents - a 79% profit on investment. Before the closing bell, the warrior has picked up a cool $50,000.00. Does he cash out? You bet and usually he does this in just two to three hours!
The warrior applies this same technique to conquer his enemy (you, the unwary investor) and here is where it gets interesting. For no reason other than to crash a company or more often investors, the warrior picks his game.
Let's say HCC is a $40.00 stock and these gangs want to lower the stock so they can purchase it at a lower price. They work helping each other get out the buzz. This time they start rumors, hitting the chat rooms again and posting bloggers. This time it is not to pump HCC, but to hurt the stock. They post that the company is in the back room of a nail salon and that the government is going to close them down or maybe that they are being sued and will lose everything. After a week of bad news the stock falls from $40.00 to $31.00.
Now the gang starts their very own rally buying the stock at $31.00. You might say they are discounting the stock $9.00 a share. The warriors buy the stock at $31 and wait for the stock to gain back its $40.00 value. With the help of the Scam dogs, this won't take long. The gang will make its $9-plus a share profit by the closing bell on most days.
Cyber investment day trader gangs are the new focus of the Securities and Exchange Commission, which is beginning government crackdowns. However, they are not winning, even with the help of some helpful cyber gurus who are trying to keep order in cyber space. The warriors have influence, power, and intertwined relationships, making it almost impossible to expose them.
What can you do to avoid these types of investor scams? Be very careful when investing in small and micro cap stocks. They are especially vulnerable. Set your stop loss points (as you should with all your investments) and monitor your investments closely. Take some time to research the fundamentals and financial statements of the company.
Receiving a "hot tip" about a stock on a web log is certainly analogous to receiving a hot tip from your unemployed brother-in-law. Be wary!
Editor's Note: Joseph R. Chambers is a contributing writer to Kenneth Coleman's Investment Tracker newsletter, 4805 Courageous Lane, Carlsbad, CA 92008, 1 year, 12 issues, $139, www.theinvestmenttracker.com. Mr. Chambers is also a research analyst and assistant to Ken Coleman.
Readers can also get more information on How to avoid Internet Investment Scams by visiting the United States Securities and Exchange Commission at www.sec.gov.
