101-07 How to Lose Money in the Stock Market

How to lose money in the stock market

If you are new to trading or even if you have been trading for a while, there is something important you need to know. There are many businesses out there that peddle “Hot Stocks Newsletters” or “Penny Stock Newsletters”.  While, in theory, there is nothing wrong with this as a service, quite a number of these publications operate under an apparent conflict of interest.

For example, go to Google and type the following.

“HOT Stocks Newsletters”

Here you will see Google adverts from companies promising high 100% + returns from buying the stocks they recommend.   However, if you visit any of these sites and navigate to the disclaimer, you will find an important piece of text that explains their business model. Here are a few examples.

DISCLAIMER EXAMPLE 1
“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.”

DISCLAIMER EXAMPLE 2
“Investing in micro-cap and growth securities is highly speculative and carries and extremely high degree of risk. It is possible that an investor’s investment may be lost or impaired due to the speculative nature of the company profiled. (Company Name Deleted) its operators, owners, employees, and affiliates may have interests or positions in equity securities of the companies profiled on this website, some or all of which may have been acquired prior to the dissemination of this report. They may increase or decrease these positions at any time.”

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 vast 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 its 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 shares to realize a profit.  This is called selling into strength.
  7. The people receiving the emails 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.

That is how it works. Beware!

Summary

In this section, we learned about different ways of making money in stocks and the types of stock that exist.  We even discussed how to avoid potentially biased “Stocks Newsletters.”

In the following section, we take a look at investing in funds.

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