Because you’re a HerMoney reader (and we’re so glad you are!) you’ve probably also spent a fair amount of time doing research on various websites that break down companies’ earnings, investing trends, market projections, etc. (We know members of our InvestingFixx club are always checking the latest headlines!) Perhaps you’ve even signed up for a few promotional emails along the way. If so, we’re guessing that you’ve been on the receiving end of countless inbox promises of “insider secrets” that Wall Street “doesn’t want you to know,” or predictions for 3,000% returns. No matter the headline du jour, the assurance is always the same: You can beat the markets, if only you’ll work with us.
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Allow us to confirm what you probably knew all along: Most of these come-ons are stock scams. While someone might actually make some money off the “hot stock” being touted, it most likely won’t be you. But where are all these big promises coming from, anyway? More than likely it’s a bucket shop: Shady brokerage houses that look to find unsuspecting marks and convince them that companies of questionable value (often penny stocks on the brink of bankruptcy) are the next Nvidia or Tesla. (You may be familiar with the term from the movie “Boiler Room,” and if you haven’t seen it, it’s worth a watch.) Or, if that sales-y email isn’t coming directly from a bucket shop, it may be from a writer with questionable ethics who’s been paid to help boost the price of a particular stock. No matter who sends (or posts) the message, the goal is the same: Get more suckers in to boost the price of the stock so those already with a position can get out with a profit.
How Many Bucket Shop Scams Work
As you might have guessed, it’s similar to a Ponzi scheme, but with stocks. Here’s how it might play out: ScamCo (Symbol: SCAM) is selling at 77 cents a share. It’s in a super-hot sector, like AI, for example. The company may not even have a product yet — but “insiders” say it’s “close” and/or “revolutionary.” Meanwhile, ScamCo’s owners are hoping to get the stock price up so they can get their company listed on the NASDAQ, which will improve their legitimacy and help bring in new investors to raise the capital to make their product. (In order to get listed, a company must hold a price over $5 for 90 days, and then must maintain a price over $1.) It may be that ScamCo’s owners actually believe they may be onto something big, or the owners and investors already know the company is circling the drain and they want to make some money before the doors close, by unloading their millions of shares of soon-to-be worthless stock. To do that, ScamCo would hire one or more outfits to make their company seem like the greatest thing since sliced bread. They might flood the wires with press releases, or buy investor email lists to blanket with hype, sending out graphs showing ScamCo’s fast rise from 35 cents to 77 cents, or false projections claiming that within 2 years, ScamCo will be selling at 100x multiple.
It sounds like something you’d never fall for, but…
Even The Wisest Of Investors Get Taken In
Yes, it’s possible for even the most risk-averse among us to get fooled every now and then — especially if you start to feel like your other investments are “boring” or just treading water. (Our brains may know that slow and steady wins the investing race, but sometimes it’s fun to think about the “what ifs,” and imagine ourselves hitting it big.)
So, one day you may say to yourself: “What the heck, I can afford to buy 1,000 SCAM shares for $770, and if it hits, I’ll have a nice nest egg.” It’s a reasonable thought… only ScamCo is never going to hit. The promises you read online were empty, and while the founders of ScamCo may not have set out to bilk investors, they’re now stuck and they’re trying to save themselves. And it’s easy to be blinded to this when other investors start talking about how much they’ve made — all it takes is a few investors who got in at 77 cents talking about how much they made (a million shares later) once the stock starts selling at $1.10, to tempt the next wave. But eventually the people who got in at 35 cents or lower sell en masse, the stock price plummets, the company files for bankruptcy and all the get-rich-quick investors lose their money.
So, what should your biggest takeaway be from this, other than avoid stock scams and bucket shops at all costs? Like everything else in the world, if it sounds too good to be true, it probably is. Also, having trusted investment advisors in your corner is everything — that’s why HerMoney CEO Jean Chatzky started InvestingFixx! So, if she has never heard of a “hidden gem” (that supposedly has Nvidia and AMD running scared, or that’s going to upend Big Pharma), you should probably take a deep breath and start doing your own research — a lot of it, from reputable sources.
Speaking of which…
Where Should You Get Investing Information?
Aside from HerMoney’s InvestingFixx classes and newsletters, there are several different places you can turn for reputable stock tips:
1) Legitimate analysts working for major investment firms. Think JPM, Vanguard, Fidelity, Morgan Stanley, UBS, etc. These people spend hours going over balance sheets, interviewing CEOs, visiting plants, and tying all their specific knowledge into the bigger macroeconomic picture to give their opinions about the future prospects of a particular company or sector.
2) Reputable news sources. CNBC, Fox Business, Bloomberg, the Wall Street Journal, The New York Times, Kiplinger and Barrons, to name a few. Reporters and editors at top-tier news outlets like these have been covering Wall Street for decades and have a keen eye for what’s hype vs. what’s actually happening.
3) Subscription services. There are some very legitimate subscription services that offer stock tips, like Motley Fool or Seeking Alpha, for example. These resources can be great, but beware of services that promise too much, charge too much, or offer no transparency. And if you’re just starting out, our InvestingFixx classes are pretty perfect!
4) Your own life experience. Think about what industries are hot in your state, or which of your favorite retailers are overachieving in today’s market. What products are out there that you just can’t live without? Just as you should never buy a stock without researching company fundamentals, you should also always look at the world around you before making a trade.
5) Word of mouth — from people you trust. We’ve joked before about getting hot stock tips from the hair salon, but there is merit to keeping your ear to the ground for investment advice from people you trust. That may be a brother, a niece in finance, or your accountant. Just make sure — and you know exactly what I’m gonna say — Do. Your. Research.
READ MORE ON HERMONEY:
- How to Handle Sudden Stock Market Moves
- Market Volatility: Is It Time To Get Used To It?
- The Two Economies and Stock Market Investing Today
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