Stock Scams 

Wouldn’t it be wonderful to become rich investing in the stock market? Just one good stock that goes up hundreds of percentage points will do it.  Right?  Not really. The human emotion of greed leaves us prey to those who would lead us to believe we can have gain without any pain (or work or study) and we usually become someone’s fool when we try to get rich on one big stock kill.

If you have an Email account on your computer, I’m sure you have received at least one offer to buy a penny stock that is ready to go up high and fast.  These scams are widespread.  Once you get on someone’s Investor List and they share or SELL it, you will get them en masse.  The stock is usually about 8 cents, and expected to go to a dollar (at least) very soon.  An oil company has just found a rich new field, or a biotech company has a new cure for cancer.  Please, please don’t get involved in these deals.  I suggest you immediately delete any message about a stock that is advertised over the Internet.

One such optimistic Email hooked my son.  The stock was only 8 cents, so he could buy thousands of shares!  He took a couple thousand out of a savings account and bought it using a “market order.” Unfortunately, he didn’t know that a market order in many situations can be dangerous.  When his order went through, he had purchased the stock at 22 cents, not 8 cents.  Well, before the week was over, the stock had never gone any higher, and was down to 6 cents.  What a terrible loss!  This is called “pump and dump”. Hopefully, he has lived and learned.   

I have a similar story. One day I heard a rumor about Mad Cow disease being found in a few cows in the US. The talking heads on CNBC said that a company with the symbol of SURE had the best way of dealing with tainted milk.  Since I heard the message as soon as it broke, I was sure I could get in early and make a fortune!  I put in a market order so my order would go to the top of the heap and execute fast.  What a nightmare!  While I waited for my “market order” to go through, I watched the stock rise from approximately $5.40 to $7.20.  Finally, my order executed.  Unfortunately, the rumor was false, and by the next day my stock was down to $5.00. 

Even when you buy on honest good news, you set yourself up to lose in the stock market.  If you hear great news about a stock you don’t own, please be careful when you buy it.  The hedge funds and the big traders are just waiting to short it as soon as the masses jump in and drive it up. When they sell it short, it will go down big. I can’t think of one time I have prospered by “buying on news.” Usually, the stock gaps up in the morning and by the time I decide to buy it, the smart money has already bought, it is technically overbought and ready to go down.

Another stock scam is buying an IPO or Initial Public Offering.  This is a company that is  going public and issuing shares for the first time to raise necessary cash.  Some of the discount brokers are now offering IPO’s to their clients.  Beware!  Most of the people that make money on IPO’s jump in and out on the first day.  They are the lucky few who can buy at the offering price and have connections or mucho money. .

I have purchased IPO’s in the past and have lost on all of them. Imagine Films (Ron Howard); Planet Hollywood (Demi and Bruce); and Boston Beer are three that come to mind.  I remember waiting in line to buy Boston Beer, which had come out at $20 in the morning.  By the time my broker could get my order filled (early in the morning) my price was $32.  I’m not sure if it ever returned to my buy price.  As the years passed Imagine Films went private again and Planet Hollywood went bankrupt. The only ones who made money on those stocks were Demi Moore, Bruce Willis, and Ron Howard.  I’m sure they didn’t wait long to sell their shares.

Well, I don’t want you to think that all stock market investing is dangerous.  It is risky.

Yes it is, but it need not be dangerous. If you are patient and wait for a smart time to buy a good stock in a defined up trend, you will be one of the smartest investors in the market. A stock in an obvious uptrend will usually at some point hit its 20-day moving average and correct as sellers take profits. This is a good time to buy. If you really want to be safe, wait until it goes just above its 50 day moving average.  You can find moving averages on charts on the web that are free.

For my long-term portfolio, I personally do not buy stocks without earnings.  Earnings are profits. If a stock has earnings, it means that the company is making money. Do you want to buy an idea that may or may not come to fruition, or buy the stock of a successful company?  I would rather buy a thriving and moneymaking company.  If you are not trading a stock, but building a position in it, you want to accumulate a stock that has increasing earnings and revenue (sales). 

It’s easy to find the net income and revenue of a stock on many websites such as CBS Marketwatch.com under “financials.”  Compare the net income and revenue from quarter to quarter and from year to year.  If it is increasing, it is a buy candidate.  . 

Building a position in a good stock is a great way to get rich, but slowly. Just stay away from the IPOs, the advertising hype, rumors and buying on news.  I believe that if a
long-term investment in a stock is appropriate for you, it will still be appropriate two weeks from now.  Don’t rush.  Take your time. Chart the stock to see its trend, don’t buy at the very top, and find out if it has earnings and revenue that are increasing. 

If you are a member of Tactical Investor’s Market Update, the stock selection process for a long-term portfolio has been done for you.  Take advantage of Sol’s stock picking talent, and add his picks to your portfolio.  However, I still believe it is advisable for you to learn to pick stocks yourself as well.   

I have given you some basic rules for buying stocks, and if you follow them you will not make the mistakes I made in the past. In fact, you will be smarter than half of the people who buy stocks in the market.  I will discuss trading stocks in the future.  But first, every woman should have a long-term portfolio and now you know what to avoid and how to build one.

Happy and Profitable Investing,

Tracey

Feel free to send questions to tacticaltracey@tacticalinvestor.com.