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Stocks ready to soar – or the biggest internet scam in investing

If you have an email address not protected from spam by an impenetrable corporate firewall (which is unlikely by the way), then you are in the 99% brackets where most of the people are. Then for sure you receive at least once a week, depending where you disclosed your email address, an urgent request mail.

You are not privileged in any way, nor prosecuted by the fate. Most of us receive “confidential” investors alerts, whereby some “knowledgeable” person discloses you a huge investment opportunity. The emails studied by have 3 characteristics:
– they show you the history of a very successful share, usually from the 2nd tier of Nasdaq, whose price has rocketed in the last few weeks and which they say it has very good perspectives;
– the share really exists and the price history is true and
– they urge you to buy as much as possible (which is very logical from the receiver’s perspective).

First time when we at receivd these bogus emails (several years ago) we believed them. And then we started to wonder – why in the world would somebody give you for free such a hint? Something looked fishy and we did not bite.

For good reasons indeed. The mechanism is very simple. The senders of the email start several weeks before sending out the emails, by choosing a company with a low market capitalisation (no of shares multiplied by their market value). Usually they choose a company listed on Nasdaq with few transactions. Then they start to buy its shares, a move which over a few weeks can seriously increase their value, since the low number of transactions means that you seriously influence the price. And this is the trick: when they stop buying, they send out the emails to the “innocent” victims, urging them to buy further and thus raising even more the price. And when others start to buy they sell the shares thus acquired, rounding very good profits.

Of course these tactics are illegal and look like market manipulation. But because the company is usually small and the number of transactions not very high, this is not usually investigated by the SEC or by some other authority, since they have their hands full with bigger issues.

What would be the appropriate answer to such and email? I would sell short those shares, since they would start to decline soon after a short further increase. Or I would post an announcement on company’s website letting people know that somebody’s manipulating the price… Then I would not like to be in the sender’s shoes…
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