Message Boards .
**Reposted by originunknown
There's no question that message boards can be a great resource. But they can be dangerous places, and investors have lost fortunes by trading on information they read on the boards. Securities regulators say they are troubled by the fact that so many investors seem to believe the message boards are full of hot "sure-thing" stock tips.
Message boards shouldn't be viewed as any different from a crowded room full of strangers. Trading on advice there is akin to trading on stock tips you receive from a stranger's conversation you overhear at a party. Still, people do it all the time. In fairness, message-board users have at times come up with quality "scoops" about companies -- catching wind of a merger before it happens, or learning that the company has secured a patent on a new technology. But often the information on the boards is pure speculation.
It's important to understand that just about everyone who posts messages has a motive, and it may be different from yours. When money is at stake -- as it is with any investment -- there's really no such thing as a completely objective discussion. People don't want to hear bad news about companies they invest in, and even the best-intentioned debates often end up in mudslinging. Likewise, it's important to remember that short sellers -- those who bet that the price of a stock will decline -- can profit by stirring up panic on a message board. People also can profit by stirring up excitement on the boards about stocks they own.
All these things point to the importance of not relying on information you read on the boards. "You should assume everything you read online is false until you can confirm it somewhere else," said John Stark, chief of the SEC's Office of Internet Enforcement. "People know not to believe everything they read, but think that somehow the Internet makes things more legitimate, and it certainly does not."
Here are some things to watch out for, and ignore, on the boards:
Blatant hyping, You're probably heading to the boards to find a thoughtful discussion on investments, but it's far more likely you'll find scores of messages from people cheerleading their favorite stocks. But that hyping can be dangerous, and contagious. When members of a message board get in the habit of explaining away bad news with statements like "I think things will get better soon," it's time for a reality check. Remember that a stock's performance has nothing to do with how much you -- or anyone else -- want the price to go up.
Claims of inside information. It's not uncommon to find users claiming to know the inner workings of companies -- when press releases are coming out, the status of development of new products, whether the company will meet earnings expectations. Some users even claim to know when particularly large purchases are about to be made in a stock. Such a purchase, if large enough, could push a stock's price higher. But, as with all claims of this sort, you should question the likelihood of anonymous message-board posters having such potentially lucrative inside information (and you should also wonder why, if they do have inside information, they're so eager to share it with so many strangers).
Stock promoters. Message boards have become favorite hangouts for stock promoters, individuals who are paid to hype a company's stock. Such people are often paid in stock rather than cash, meaning they make more money if they're able to get the stock price to rise. You should beware of message-board users who seem to repeat the company line a little too closely and know such things as when the next press release is expected. They may be on the company's payroll, in which case you should be skeptical of anything they have to say.
Stock promoters are required by law to disclose whether or not they're being paid, exactly how much, and the nature of the compensation -- even when they make postings on a message board. Still, the SEC has brought many cases against promoters who disguised the fact that they were paid, and it continues to track down offenders.
Bashers. Just as stock promoters and other hypesters profit by pumping a stock, bashers, or those critical of a company, can profit by getting a stock's price to fall. Message-board participants who are positive on a stock are always quick to suggest that anyone who bashes the stock must be a short seller -- someone betting the stock's price will fall. Most of the time, that's just plain wrong. But the SEC says it is becoming more and more concerned that some people on the boards who appear to be critical observers are actually slamming a company so that they can profit from a short sale. It's irresponsible to dismiss anyone with a negative comment as a short seller, but it would also be a mistake to think that anyone bashing a stock is just trying to save you from a bad investment. Do your own research.
Call in your certs! This is a strange one, but stranger still is how often you see this phrase pop up in message boards. "Certs" here refers to stock certificates, and the notion of "calling them in" means asking your broker to send you the actual paper certificates, rather than allowing the stock to be held for you in your brokerage account. The idea here is to prevent short selling in a stock. Short sellers make money by betting a stock's price will fall. Essentially, they borrow shares of stock in a company from a broker, paying a small fee for the service, and immediately sell those shares on the open market. Then, they hope, the company's stock falls in price, so that when it comes time for them to buy back shares to repay the ones they borrowed from their broker, they can buy them for significantly less than they sold the original shares for. The difference is their profit.
The reason message-board users try to organize a "call in your certs" campaign is that when the actual physical shares of a stock are in a client's possession, they can't be loaned to short sellers. Brokers who loan stock to short sellers are actually loaning out the shares that other customers keep in their accounts -- the same way a bank lends money that it is holding in other customer's savings accounts. In theory, if a group of investors could buy up the available stock in a company, and then get hold of the actual stock certificates, they could absolutely guarantee that there was no short selling because they would own every piece of stock, and there wouldn't be any available for brokers to lend to short sellers.
The flaws in such a plan are, hopefully, obvious. It's not uncommon for companies to have many millions of shares available for trading, and it would be virtually impossible for a group of investors on a message board to manage to control all those shares.
Oh, those market makers ... "The market makers don't want to let this baby run!" Market makers, or MMs, are the most evil people on the planet next to short sellers, according to message-board users. These are the professional traders who are responsible for organizing the buying and selling of stocks that trade on the Nasdaq Stock Market. They do this by posting a "bid" price at which they are willing to buy a stock, and an "ask" price at which they are willing to sell a stock. Nasdaq requires market makers to buy and sell at the bid and ask prices they post, and that helps to ensure that investors can buy and sell a stock if they need to. In the language of Wall Street, market makers are required to maintain an orderly market in the stocks they trade. One way market makers earn money is from the difference -- or spread -- between their bid and ask prices: If they are willing to buy for $10 and sell for $10.25, the 25-cent difference is their profit.
Many message-board users -- you'll find this most often on penny-stock boards -- believe that market makers conspire to keep the prices of some stocks down. Some go so far as to suggest that market makers themselves short stocks and then conspire to keep the price low so they can reap profits. Market makers do indeed short stocks. For instance, if an investor puts in an order to buy a stock and the market maker doesn't own any shares and can't find any other willing sellers, he or she will use a short sale to fill the buyer's order.
But the notion that market makers are involved in a plot to manipulate stocks in order to wring profits from their short-sale positions is a bit
far-fetched -- even for an industry that did face regulators' allegations of price fixing in the 1990s (market makers were accused of conspiring to bolster their profits by secretly agreeing to keep their spreads wide, and they ended up paying a huge settlement to resolve the matter). The idea that market makers would hold back the price of a stock that was in high demand is illogical. When faced with strong demand and lots of "buy" orders, surely the market marker could make much more money by buying shares, then selling them at higher and higher prices, than by trying to hold back a popular stock on which the market maker happens to be short. Indeed, market makers tend to avoid holding big positions in stocks, and they certainly don't try to get in the way of a moving market: At least when it comes to a stock that is listed on a major market, one market maker doesn't have enough money to stand in the way of all other investors in the market. There is a saying on Wall Street: "You can't fight the tape."
Price predictions. Message boards are full of predictions (many of them ridiculous) about where a stock's price will be in the near future. No one, including Wall Street analysts who do this for a living, can say with certainty where a stock is headed. Price predictions can quickly give way to hype -- if a dozen people on a message board seem certain a $5 stock is headed to $25, you may start to believe it. But wanting a stock to go up doesn't make it happen.
