Beware of these unethical “stock alerts”
NEW YORK, August 3, 2007 (RUSHPRNEWS) A month or so ago I discussed the folly of investing your hard earned dollars into penny stocks you discovered thanks to e-mail spam campaigns. Since then, a number of interesting events have transpired that back up my initial warnings.
And really, it’s not rocket science. If you get a hot penny stock tip while chatting up friends around the water cooler … chances are you missed the boat. Might I suggest the same is true if you, and a half a million other fortunate souls, receive the same e-mail.
Just how serious are e-mail spam campaigns? Spam touting stocks accounts for 15 percent of all unsolicited e-mail, according to a recent report from researchers at Purdue University and Oxford University.
Sadly, spam e-mail can do more than simply annoy you. It can send unworthy dead-beat stocks through the roof; and your investment portfolio in the opposite direction.
E-mails heralded with messages such as “Ready to Explode,” “Ride the Bull,” and “Fast Money,” clog people’s inboxes – an estimated 100 million of them a week – and spark dramatic spikes in trading and stock prices.
Stocks experience “a significantly positive return” when they are heavily touted in spam e-mails, according to the study, “Spam Works: Evidence from Stock Touts and Corresponding Market Activity.”
In other words, spam e-mail persuades some people to plunk down money for obscure penny stocks. Many are ambitious small companies with promising prospects. But you want to avoid ‘prospects’. What you want are small ambitious companies that are actually generating revenues and have strong operations.
Recently, a New Hampshire technology executive prepared his own research into the performance of penny stocks touted in spam e-mails that he received.
He created a hypothetical portfolio of spammed stocks. He discovered that if he’d plunked down $70,987 buying stocks based on spam tips when the index was created in May 2005, his holdings would have been worth just $9,387.90 as of a week ago. That’s a staggering loss of 86.77%.
Those are not good statistics. And is a good reason why you may want to consider paper trading before you use real money.
The problem of spam e-mails touting stocks are not lost on the higher ups either. The U.S Securities and Exchange Commission suspended trading in 35 companies recently whose shares were touted in e-mail spam campaigns.
The suspensions are part of an SEC effort called Operation Spamalot, which began last fall. The suspensions last for 10 business days.
The shares of most of the spam emails are tied to companies that are not traded on traditional stock exchanges. They are traded on the so-called pink sheets market, an electronic quotation service in which brokers are not required to investigate the background of the companies.
In the end, ordinary investors like you and me can suffer heavy losses when the prices tank amid the dumping of these stocks.
“When spam clogs our mailbox, it’s annoying. When it rips off investors, it’s illegal and destructive,” said SEC Chairman Christopher Cox.
“Trading suspensions and actions that will follow should send a clear message to spammers: The SEC will hold you accountable,” he added.
So, will Operation Spamalot put a dent in stock touting e-mails? If ‘fear’ is a greater motivator than ‘greed,’ yes. Unfortunately, ‘fear’ and ‘greed’ help the stock markets tick.
When it comes to e-mail spam touting tomorrow’s winners today…just click ‘delete.’
About Peter Leeds
,P.As North America’s leading expert on penny stocks, Peter Leeds is frequently contacted by top media organizations like the Associated Press, NBC, CBS, and CNNfn for his comments and views. He helps investors understand and benefit from penny stocks.