Wednesday, April 19, 2006

Have you been taking tips from message boards ?

With stock markets booming, all kinds of investors have been flocking to the dalal street these days (not in the real sense though). One of the things that have mushroomed over the past few years are the "message boards" on various personal finance cum market news sites.

A "message board" is an internet forum for holding discussions, allowing people to post messages and comment on other messages. Not just this, websites these days offer forums dedicated to topics. Famous among these topics is -- stocks and stock markets. Hundreds and thousands of some smart and some not so smart investors/speculators/traders are actively participating in these.

While participating and holding discussions is ok. What one needs to worry about is whether the common man is taking investing decisions based on the stock ideas/tips/hot stocks posted on these forums. Most of the discussions taking place on these internet forums can be used to cheat investors since there is a big question mark over the identity of the person on the other side of the forum.

A 15 year old kid was caught doing a similar act in the US in 2000. He was later on fined by the SEC for over USD 200,000. Here is an excerpt of a news article on the same -

On Sept. 20, 2000, the SEC settled its case against a 15-year-old high-school student named Jonathan Lebed. The S.E.C.'s news release explained that Jonathan -- the first minor ever to face proceedings for stock-market fraud -- had used the Internet to promote stocks from his bedroom in the northern New Jersey suburb of Cedar Grove. Armed only with accounts at A.O.L. and E*Trade, the kid had bought stock and then, "using multiple fictitious names," posted hundreds of messages on Yahoo Finance message boards recommending that stock to others.

He had done this 11 times between September 1999 and February 2000, the S.E.C. said, each time triggering chaos in the stock market. The average daily trading volume of the small companies he dealt in was about 60,000 shares; on the days he posted his messages, volume soared to more than a million shares. More to the point, he had made money. Between September 1999 and February 2000, his smallest one-day gain was $12,000. His biggest was $74,000. Now the kid had agreed to hand over his illicit gains, plus interest, which came to $285,000.

Ranjit thanks for pointing me to this article.


Prasanth said...

In my opinion, anyone "investing" in stocks based on tips from message boards is not investing - they are purely gambling. I do not know which "law" SEC used against the 15 year old but will be interesting to see whether such laws exist in India. I think not.



Ravi Purohit said...


If you read the entire article (follow the link for the same), you will realise that SEC's case quite weak. The guy actually made over USD 800,000 but the SEC fined him only a quarter of the entire amount. The author of the article is Michael Lewis (who has written some good books on stock markets. one of them is Liars Poker).

He too has mentioned in his article that the SEC had no case really...but after listening to the 15-yr kid he was rather convinced that the guy was indeed cheating gullible investors.

I think in India we are still too far in convicting pple for such crimes. We cannot even monitor insider trading to the extent we should.


Anonymous said...

i am not into realtime trading but i have a few set of question for you. being new to stock markets i have been only playing stock market games on the internet and have been investing what prasanth said is absolutely true it is pure GAMBLE but then, For someone who want to learn such message boards are a good source along with a few research from the T V CHANNELS? SO I WOULD LIKE TO KNOW WHAT IS NEEDED FROM A STARTER TO HAVE A GOOD IDEAS ABOUT THE GOOD PICKS BECAUSE IT IS ALSO POSSIBLE A BROKER CAN ALSO LEAD TO THE CASE THAT YOU HAVE SPECIFIED IN THE ARTICLE?

Ravi Purohit said...

Anonymous: I for one believe that one should not take investing decisions based on tips, be it from the friendly broker or the message boards.

One should do his/her own study of the company by looking at various sites that provide the relevant information (for eg. icicidirect, hdfcsec, idbipaisabuilder, etc.)

I think people who cannot do their homework (ie. study a company before taking an investment decision) should stick to index funds.