3 Conflicts of Interest: How the Stock Market Really Works?

Should you believe Wall Street Analyst observations of company performance, or do you suspect a conflict of interest? Get the surprising inside scoop

There are many Stock Markets in the world and they have essentially been established to allow business to get cheap financing to aid rapid expansion in exchange for a slice of the business and an opportunity to profit with the business.

The largest stock markets are located in the richest countries; this enables the business to get access to the wealth and capital available in these countries to finance growth.

By purchasing stock in a company you can benefit in two ways.

  • Firstly you can benefit from share price appreciation, the movement of the stock price.
  • Secondly, you can benefit if the company issues dividend payments.  Dividend payments are a cash distribution of profits as a reward to shareholders for holding the stock.

Wall Street analysis firms provide ratings of the companies and their stocks, however, they can be quite misguided and they are more often than not more bullish than they should be.

1- Institutional Stock Analysis – Don’t Believe the Wall Street Analysts

Most of the investment banks and brokerage houses employ Stock Market Analysts.

Their job is to research the firms in the industry they are allocated to, in an attempt to assess if the companies are worth investing in.

You can purchase the “Analyst Reports” from S&P, Moodys, The Street, Credit Suisse or the plethora of other information providers out there.  The analysts usually attend the shareholder meetings for the companies they cover and probe the management team for further information.

Wall Street analysts come under constant scrutiny for the meaningless jargon and inaccurate ratings they put on stocks.

There is no aligned meaning across the research houses as to the meaning of ratings such as:

  • Strong Buy, Hold, Sell, Strong Sell
  • Outperform, Perform, Underperform
  • Overweight, Underweight
  • Long, Neutral, Avoid
  • Accumulate, Hold, Distribute

Institutional Conflict of Interest

The analysts tend to avoid negative opinions as they tend to receive flack from the management teams and pressure that they may lose access to the companies they cover.

Analysts are not paid for the performance of their stock ratings; therefore they have limited motivation to be really truthful.

2- Penny Stocks Newsletter Conflicts of Interest

Less experienced stock market investors from time to time get caught up with companies that shamelessly promote Penny Stocks.  This industry if rife with COnflicts of interest.  If you navigate to the fine print on any of the Penny Stock newsletter sites you will typically read the following text.

DISCLAIMER EXAMPLE

“Since (Company Name Deleted) receives compensation and its employees or members of their families may hold stock in the profiled companies, there is an inherent conflict of interest in (Company Name Deleted) statements and opinions and such statements and opinions cannot be considered independent. (Company Name Deleted) and its management may benefit from any increase in the share prices of the profiled companies. (Company Name Deleted) services are often paid for using free-trading shares. (Company Name Deleted) may be selling shares of stock at the same time the profile is being disseminated to potential investors; this should be viewed as a definite conflict of interest and as such, the reader should take this into consideration.”

So let’s decipher this.

  1. “Company A” wants to boost its share price.
  2. It speaks to a purveyor of HOT STOCKS NEWSLETTERS, preferably one with a huge email contact list.
  3. “Company A” may agree to give the Newsletter publishers payment in the form of “Company A’s” stock, for the service of convincing it’s clients to buy those stocks.
  4. The Newsletter publishers receive these stocks, then they recommend buying “Company A” in their newsletter.
  5. As the people receiving the email start to buy the stock, the stock naturally rises.
  6. As the stock rises the Newsletter Publisher and perhaps even people inside “Company A” can then sell the stocks to realize a profit. This is called selling into strength.
  7. The person receiving the email see the stock rise temporarily and then fall. Of course, they cannot complain because they will be advised they should have sold sooner and that they should read the disclaimer.

To watch the full expose video on Penny Stock Scams go here.

3 – Alternative or Private Market Conflicts of Interest

If you decide to invest in alternative markets, such as Pink Sheets, “Over the Counter” (OTC) or even specific derivative markets like CFD’s the operators of those markets may have a conflict of interest.

Sometimes they directly need to take the opposite side of your trade and can therefore manipulate the Bid & Ask prices according.  I high-quality mature company will have a Risk Mitigation department to try to resolve and avoid any conflicts.

I hope this has given you an insight into how the stock market works from inside Wall Street.

For more revelation and insights into this topic see the Book Full of Bull on our Top 20 Books List

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