As an investor, you must analyze the essentials of investing in stocks by examining the following questions that determine the fundamentals of any given stock for a certain company.
- How much have other investors paid for one stock?
- How much are investors likely to pay for one stock in the future?
- What details will change the investors’ perspective about the stock?
Through proper inquiry of these questions, you, the investor, will have the tools to make an educated decision about the stock you are planning to purchase.
As an investor, be prepared to rank the return expectations on the stocks that you are planning to buy. For example, if you are planning on buying three different stocks from three different companies, you must estimate how much money you feel that you would earn from each. After you have your estimation, you need to determine if it is logical to purchase these stocks. Pending that you will earn at least 20% more than you invested, it is probably a good investment, therefore, you should consider buying stock in that company.
Once you have efficiently analyzed all of the stock options that interest you, it is time to choose the stocks that best meet your needs for a secure financial future. This is most easily done by keeping a running record of each stock that you feel is a good, virtually risk-free investment. Then, when you are ready to invest, you will have notes to compare in order to decide what option is best for your situation at that time.
Now that you have purchased some stocks that you feel will help to advance your financial future, you need to learn about stock trading. If you feel that your stock is not exactly producing the return you had hoped for, then you may want to consider trading in your stock. Stock trading is great because if you purchase a stock that you are dissatisfied with, then you may want to consider trading it for a stock that you will be more satisfying to your financial needs. In order to simplify the explanation of stock trading, it is simply trading in your current stock for another stock that will produce a higher return rate.
There are two ways in which stock trading can occur. The first method is on the exchange floor, which constitutes images of movies and television portraying how the stock market works with thousands of people rushing around and yelling in an environment of total chaos. Although the chaos occurs, at the end of the day, all trading options are worked out and the employees must get ready for the next day. More simplistically, what takes place is you want to buy 100 shares from Company X so your broker, the person who makes your stock purchases for you, sends your order to their floor clerk, the person that processes your stock order, on Wall Street. The floor clerk communicates with one of Company X’s floor clerks to determine who would like to sell 100 shares of Company X.
Once determined, Company X’s floor clerk and the floor clerk of the person wanting to sell 100 shares to you set a price for the shares. This price is communicated back to your broker who finally notifies you with the final price for 100 shares of Company X. Once you tell your broker that the final price is acceptable, the shares of Company X will be purchased and you will receive confirmation in the mail in about two weeks.
The second method is much less complicated because it is done electronically through computer systems which are much faster as well as more efficient. The buyer must still obtain a broker because the public does not have access to Wall Street’s investment programs, however, once purchased, the buyer usually receives instant confirmation of bought shares via email and the transaction is complete.
No matter how you intend to purchase shares of any particular company, the most important task you, as an investor has, is choosing the right stock that will fulfill your future financial goals.
Dangers of Stock Trading
Unlike foreign currencies which trade in a huge, global marketplace, stocks of small companies can lend themselves to manipulation and fraudulent practices more readily. The primary reason for this has to do with the nature of the stock market and the comparative lack of liquidity which does not usually present an issue in the currency market because of its size and depth.
As a result, stocks tend to be more carefully regulated and monitored by agencies such as the Securities and Exchange Commission which was founded in the aftermath of the huge stock market crash of 1929. A variety of different fraudulent practices involving stocks are listed in the sections below
Corporate stock fraud usually involves officers of the corporation disseminating false or misleading information in order to increase the value of the company’s stock. They do this in order to later sell the stock at the artificially inflated price. Enron was a classic example of a corporate stock fraud. Other ways that corporate executives perpetrate fraud to manipulate the stock market include: making large purchases amongst several colluding investors in order to make the stock appear to be under accumulation by third parties. This might then prompt other investors to buy the stock at inflated prices. After taking the stock price higher through these pre-arranged transactions, the stock is subsequently dumped by the perpetrators at the inflated price. This falls into the general category of a “pump and dump” stock scam.
Churn and Burn
Another type of stock fraud involves unscrupulous stock brokers that overtrade in their customer’s accounts in order to charge an excessive amount of commissions. This type of fraud is widespread and is not particular to the stock market. Any financial market where a broker performs executions of financial instruments, especially on a discretionary basis, is subject to this type of fraud. Unfortunately, many people have no idea their broker is doing this if they have given the broker power of attorney over their account and do not monitor it closely.
Pump and Dump
This form of securities fraud has become especially widespread since it now often uses the Internet for the pump part of the scheme to artificially inflate a stock’s price. Con artists employing this scam disseminate fraudulent information via chat rooms and by spamming people’s e-mail accounts.
The false information will typically produce a rise in the stock price. At this time, the fraudsters dump their stocks and the subsequent investors lose out. This type of stock fraud works best with thinly traded and illiquid stocks that have little public information available about them.
This type of securities fraud is performed by the corporation’s key personnel, directors and holders of a large percentage of the outstanding stock or other corporate insiders.
Basically, the fraud involves such insiders who trade on information which is yet to be made public. This might include such things as a pending corporate takeover or a disappointing earnings report, for example.
Other Stock Fraud Situations
Corporations can sometimes “cook the books,” which involves the corporate accounting of the firm, making it appear the company is doing much better than it actually is, making the stock price reflect the distorted information and defrauding investors. This sort of fraud came to light recently in the huge Refco case that forced the company into bankruptcy shortly after its Initial Public Offering or IPO.
Shorting stocks, which involves borrowing stock in order to initiate a short position, can also be fraudulent if done with the intent to profit by subsequently disseminating false or misleading information to make the market in the stock drop. “Short and distort” is the common term for this sort of stock fraud.