When an investor receives a newsletter full of stock tips and information, the first instinct is to act quickly on the information in order to make money before anyone else does.
However, scam artists realize that investors like to make decisions in a short amount of time and capitalize on this impulsiveness. This is why newsletters work so well to lure in new victims.
There are several things that investors can do in order to protect themselves from bad information that may be found in newsletters, emails, or text messages.
First of all, the source of the newsletter needs to be acknowledged. This will give the reader a clear idea as to who might be benefiting from the sale of the stock.
Disclosures of the information that are nonexistent or difficult to find might be a clue that the newsletter has other motivations for their advice.
Any newsletter or publication that advises you to invest in small stocks that aren’t filing reports with the SEC should be carefully scrutinized.
These kinds of stock tips are trying the famous ‘pump and dump’ scheme in which a little known stock is strongly advised, causing many investors to invest their money in the stock.
The demand for the stock then goes up, along with the prices. However, the scam artists will then sell off their shares of the now-high priced stock, leaving the investors with a loss for their initial investments. These kinds of small stock are almost guaranteed to be scams or stock that won’t do well.
Researching the source of the information is strongly suggested as any holes in the story may be signs of a possible scam. By going to the SEC, the NAAD, and the local regulatory committees, an investor can see where the stock’s company is registered, if they are registered, and even take a look at their financial reports. Asking a lot of questions is the best way to get a fair picture of the stock and how it could perform for the investor.
The local state securities regulator can give an investor a wealth of information about a newsletter. In some cases, the newsletter may have been sued by the SEC and that information is then kept on record. Newsletters that have a history of this litigation may need to be looked at more carefully. While this doesn’t necessarily mean that the newsletter is false, it may point to a valid concern.
The reason why newsletters aren’t being shut down and regulated is because they are generally considered under the freedom of speech amendment, leaving the responsibility for good or bad information squarely in the reader’s lap. These newsletters can not be prohibited outright, but only scrutinized for their accuracy.
Just like spam emails, newsletters that are unsolicited are generally not full of good advice that an investor should take to heart. As with any advertising, these newsletters are trying to seduce an investor with promises that will not be fulfilled. However, with a little research and time, the truth of the newsletter can be clearly seen and information disregarded.
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Joel Arberman is the Managing Member of Public Financial Services, LLC. We help private companies through the process of going public via an initial public offering (ipo) or direct public offering. Learn more at www.PublicFinancial.com
