Avoiding Stock Market Scams, Stock Advice Sites, and Where to Find the Free Information
Things are always too good to be true.
I'm sure you've all received the spam in your Inboxes about stock picks. If you've already researched stocks, mutual funds, ETFs, or anything related to investments there's likely going to be a dozen or so websites offering information or stock picks for a "small fee." Have you gotten the e-mail about making about making $350 or so with just $1000 managing capital? Yeah, that's called a stock trading robot. It's a genius at picking penny stocks about to double, triple, quadruple, whatever you want him to do!
And the reason robots can do such a wonderful thing is because they're not real. No, friends, msot of the robots' picks are whatever their creators want them to be. And the reason? If you want to make a lot of money on penny stocks, and we're talking a lot of money, you need to be the one doing the picking.
Stock prices are all about supply and demand, rarely if ever are they solely based on the company's fundamentals. If you're in a position to take advantage of this principle then you stand to make a lot of money in the market, and here is how you do it.
The first thing you need to do is create a newsletter claiming to offer its subscribers the hottest picks out there. You can create even more buzz by saying things like, "This is a small list," "I only allow a certain number of subscribers per quarter," or "Act now! Your spot has been reserved!" Sound familiar? It gets people excited about this, but the truth is you can subscribe whenever you want, there are no "waiting lists," and there are probably thousands of subscribers. Except they're not the ones making the money. They do two things which make money for the stock pickers: subscribe to their newsletter for, oh let's say $47, or they run up the price of the stock for them.
A so-called penny stock is a stock who's price is very low and fluctuations are usually a few pennies a share. If you want to manipulate this with your newsletter to make boatloads you can do so easily if you have enough loyal subscribers. You simply buy the stock at the low, low price of $1.00 or so and then you send out your pick in your newsletter. If you have enough subscribers and there's enough buying pressure then the price of the stock begins to climb. With penny stocks it's quite easy to run the price up 30% or so, or double the price, if there is enough buying pressure. This creates a bubble. The stock is now becoming overbought, and therefore overvalued. We all know what bubbles do when they become too big, and the same goes for stock prices.
You've now run your stock price up to about $1.50 and you sell all your shares, netting a nice profit for yourself. What happens to your subscribers? Well, the lucky ones who read the newsletter early on are riding the upswing with you, and provided they sell in time they make some money. What happens to most, though? They bought on the upswing, let's say at around $1.35 or so, and now at $1.50 you're selling off and the price begins to fall as everyone cashes in on their gains. Before you have a chance the stock is back down to $1.00 a share. Doesn't seem like much, but imagine if you had invested $1,000 into that baby and bought late at $1.35... you're now down to about $740, all thanks to the advice of an expert penny stock picker.
You've all seen the ads out their for other newsletters offering stock advice. Some of the information in these newsletters is much more reliable, accurate, and oftentimes good advice. The problem here is that you're also paying for this information, and you get what you pay for. Sure, a yearly subscription might seem like a small fee to pay to see the 20% or more returns these newsletters often claim they can provide, but does this happen?
A lot of these newsletters have good information, and they get you to sign up in the form of a teaser. "The next Berkshire Hathaway" (Warren Buffet's company) gets thrown around a lot. Don't buy into this. By the time these guys get their picks, compose and distribute their newsletter, and you read it a couple things have happened, much like the penny stock example.
The big players in the game- investment banks, mutual funds, and hedge funds- are highly advanced investing machines. Going against these guys will chew you up and spit you out faster than the market could in other conditions. When these guys decide to go into a position, they go in full force. They have to do so gradually to accumulate the entire position, and as they do so the buying pressure runs the price up. They often buy the good companies a lot of newsletters talk about because they are, after all, good companies to buy. You get your newsletter and the major players already acted on that information. And as shown before that delay costs you a lot.
The thing about a lot of these better newsletters is that they do have great information. The advice they give on investing and money management is very practical, and extremely useful for beginner investors. A lot of it is also available for free on their main sites, or you can discern it yourself from their teasers. Ultimately, I'm not trying to tell you not to subscribe to information newsletters... just trying to warn you about what you're likely to get. You get what you pay for, and good information is not cheap.
I don't believe in a buy-and-hold strategy, which is what a lot of these newsletters can promise. I'm more into re-assessing your portfolio on a quarterly or monthly basis. And to do so you need to be slightly more pro-active thanjust buying a newsletter and following their word. We are not completely at the mercy of stock advisory e-mails.
Some reliable sources of information.
So don't fret. The internet is full of amazing free information for you. As I said earlier, some of these newsletters are full of some genuinely good information. You just don't have to pay for it. A lot of the information in the teaser is enough to figure out what they're talking about. If you're not into the research, check out the Stock Gumshoe to do the dirty work for you.
Other great sources of information include Google and Yahoo's finance sites. Not only is the data up-to-the-minute, but they provide a lot of statistics there as well as a glossary and information on how to decode them. Some of these, such as P/E/ Ratio, ROE, and Alpha and Beta, are key components of good stock analysis and once you figure out how to analyze them you can do your own stock picking. There are also some pretty good books out there on how to use this information, but oftentimes these books are marketing campaigns for the authors' own stock-picking newsletter. Wading through these books to find the useful ones as opposed to the "Stock Market for Dummies!" is difficult, but worth doing.
Blogs can also be useful, especially on Yahoo and/or Google Finance. Sure, you get the emotional investors talking out of their you-know-whats, but oftentimes I see some real savvy analysis being posted on some of the message boards. A lot of the people who are going to check out these postings for a particular stock or index post their own technical analysis, and the more information you have the better armed you are to take on the market. So read through these, it's completely free and readily available.
Use free resources as much as possible. In order to understand some of the numbers beyond the free glossary terminology or, dare I say?, Wikipedia I do suggest investing some money into a couple of reliable books, but you don't need their newsletters. Not only do they clog your Inbox, but by the time people act on them the major players are already dug in. The key to beating the market is information, and that does require a bit of research on your part, especially at first.
How to inactively actively manage your money.
I'm going to keep this brief, but if you'd like me to expand on it just ask me to do so and I will. But if you don't want to be an active investor (monitoring the market will give you heartburn) yet still want to net impressive returns you can do so rather painlessly.
Mutual funds are great, sure, but there are costs associated with these, minimum investments, direct deposit monthly requirements, etc. that can diminish your returns. Instead, look into Exchange Traded Funds (ETFs) for some easier options.
The Sector SPDRs, for instance, are a snapshot of the S&P 500 index broken into its nine sectors- energy, financials, consumer staples, healthcare, etc. If you check out www.sectorspdr.com you can access all sorts of wonderful, reliable, and free information on these.
The great thing about these is that you can become your own mutual fund manager, and relatively easily. Just set up an online trading account and for some very cheap trading fees (usually $4 a trade or so) you can buy some ETFs. With the market bottom likely approaching (check out my other Hub about the Bear Market Bottom), this is a good time to buy some ETFs for a long-term hold. Just stay as far away from Financials (XLF) as you can and you should do okay for the time being.
These ETFs also pay a modest dividend, meaning for every share you purchase they pay out a certain amount to you every quarter. I suggest re-investing these dividends to take advantage of the magic of compounding. (If there is enough interest I will also get up some more information on compounding soon, and how a mix of market timing, monthly or quarterly re-assessment of your portfolio, and what I call an inactive active trading style can set you up for some market-beating returns in almost any market conditions... all with some very little work on your part after you do your initial research, but it does require more work than just a typical buy-and-hold investor.)