There are some people that are convinced that stock prices are manipulated. They are convinced that there is a super-secret Facebook group that if they could only join, they would become rich. Of course, many of these folks would jump at the chance to be first in on the next pyramid scheme.
However, as an average investor, you need to know how to identify and not get burned by certain stock market trading situations.
In the United States about the only fraudulent trading that will get you in trouble is buying or selling on insider information. The most famous case in recent memory was when television personality and businesswoman Martha Stewart went to prison. She received nonpublic bad news from her stockbroker.
In the Philippines insider information is usually a joke as witnessed by the several issues that have been absolutely guaranteed by the “highest sources in the government” to be “the third Telco.”
However, “hype and dump” is common on the Philippine Stock Exchange (PSE) because we, local investors, love hot tips. It is embarrassing to name the names but Easycall Communications Phils. (ECP) went from $4 to P70 and now back to the P24 area where it has been for about five months. ECP is not even on the most recent list of companies who intend to submit a bid. Perhaps the ones who bought at P50 (and are still holding) and the ones buying now are still getting their secret insider information.
Buying into a hype and dump is great if you are not the last one in or the last one out. I promise you that it is easy to spot the beginning of the run and also the top and you do not need to be the illegitimate “close relative” of a high government official.
Every stock market issue follows the same pattern. Ok, not “every” issue, but the few exceptions only prove the rule. The “smart money” comes in first followed by the “friends of the smart money” and finally at the top come the “suckers” that give the profit to the first two groups.
You can see this like the morning sunrise welcomes the new day if you look at a price chart. Find first an obvious increase in volume. Then usually comes a quiet period, followed by the “friends” volume spike and the price takeoff. Finally, the biggest volume will come at or near the price top as the last of sucker money comes in. Then you know the fun is over.
In the group of potential third telcos and those companies that may be used as a backdoor for the entry of a foreign partner, not one survived the initial price explosion in December, January, and February without a massive pullback. Some have started a second run, which might even be based in reality.
If you bought one of these at the high and it turns out the company is selected, congratulations on your brilliant Nostradamus-like prediction. But the reason most of us are investors is to make money, not to be fortune-tellers. That means buying the stock at a low price and selling high.
Note this very clearly. Hype and dump is not an illegal situation. There is absolutely no indication or thought that the rise in the price of Easycall or any of those other issues was fraudulent or malicious.
It is just that crowd psychology often creates unjustified and unwarranted price movement. It is the same mentality that has people wait an hour in line to “Buy1-Take1” for a product that they would not normally want or buy.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.