The short and distort player will look for stocks that might be overvalued. When there is little activity on a stock due to news, the short seller may come into the market and sells the stock. He will then spread unsubstantiated rumors and other kinds of unverified bad news in an attempt to drive down the equity’s price. This can be done by negative posts to message boards, chat rooms, newsgroups, issuance of newsletters recommending the sale of the stock, seminars, private phone calls and similar. The plan is to entice investors to dump their stock with the prime objective of driving the price down. Instead of excitement, the distorter tries to stimulate fear. When the price is falling, the manipulator will buy stock to cover his position. Buying the stock at a discount and thereby making a profit. In order to create a selling frenzy which the distorted must do in order to buy enough stock to cover his position and not drive the price up he will create the impression that there is a great deal of selling taking place. He will do this by having his friends and brokers cross stock to each other giving the impression of large volume. In the end the investors who bought stock at higher prices will sell at low prices because of their mistaken belief that the stock is worthless, caused by an effective negative campaign.
TIPS FOR AVOIDANCE
- Everyone providing investment information or advice must fully explain the nature of the relationship between him and the company that is the subject of the report. If there is no disclaimer, investors should disregard the report
- Potential profit should not be exaggerated. Assumptions upon which the earnings model is based should be clearly stated so that the reader can evaluate the reasonableness of the assumptions. If a report lacks these details, it is generally safe to assume that the report lacks a sound basis, and investors should ignore the report
- It is a good sign if the author’s name and contact information is on the report, because firstly it gives you a way to contact the author for additional information and secondly it shows the author is proud of the report. If the author’s name is not given, investors should be very skeptical of the report’s contents. Don't believe everything you read and verify the facts on your own before making an investing decision
- Beware if the report contains a lot of great words and exclamation points. Good analysts are not supposed to be boring, but good reports don’t read like a Mcdonalds commercial. A good report should be interesting, but would never use exaggerations, sure things and guarantees. You would never be suggested to mortgage your home to buy a stock
- An ongoing research coverage usually acts as a sign that the firm legitimately believes in the long-term potential of a stock