Here are the FACTS:
By LAW, any person or company recommending stocks must be authorized to do so. This can be a Securities and Exchange Commission SEC license, certification, or other credentials. Always check to see what credentials the company or person has, before trusting their recommendations. They should be either a Stock Broker who has a license that allows him to recommend stocks, or a famous guru who has been around long enough to establish a reputation with strong credentials to support their ability to act as a recommendation service.
What the LAW states:
If anyone or any entity is recommending a stock, that person or entity MUST state whether they are buying or have bought the stock they are recommending. The object of this law was to protect Independent Investors and Retail Traders from scams.
UNFORTUNATELY the LAW does not require the recommendation service, to provide information regarding the intent of the purchase of that stock. Nor does it require that the person or entity reveal, if they are intending to SELL the stock or are selling the stock. So at any time after the recommendation is given out to the general investing community, the original person or entity who recommended the stock can without any notice to anyone, sell the stock.
This is one of those gigantic loopholes that inspires “legal manipulation of stock prices.” A recommendation service can legally recommend a stock, and then turn around and sell it as the stock rises in price.
Why would a stock rise in price after a recommendation? Is it because it is a great stock OR is it because everyone believes it is a good stock to buy, because someone said so?
All too often the system is exploited. What happens after a stock is recommended is that every Independent Investor who is too uncertain to choose their own stocks, AND every Stock Trader who does not know how to find great picks for themselves all rush to buy the stock. When a lot of buyers want to buy a stock then price rises, even if there are large lot sellers at least for a time.
Supply and Demand kick in and if the recommendation service is careful about how they sell, the stock will run up for a few days and then move down.
Since most Independent Investors are “buy and hold” they stubbornly hold onto a stock that is trending down, until finally it loses so much money they capitulate and give up. This does not happen with all recommended stocks, but it does happen all too frequently. Most of the time stocks are recommended because those who got in at a much lower and better price, want to sell and they need buyers to keep price from collapsing as they sell out.
This is a reality few Independent Investors and Retail Traders want to hear or believe.
What can you do about it?
First learn how to find great stocks to buy for yourself. Then you will be in with the gurus and large lots before the recommendation users get in, often a huge point gain difference. It is not hard to learn how to find stocks to invest or trade; it just takes a little practice, knowledge, and skill.
The other big problem with recommended stocks is that High Frequency Trading Firms HFTs using computer quantitative algorithms are predators. They constantly monitor every News Feed, Twit, Tweet, and Facebook mention of any stocks that the retail crowd may want to buy.
Since HFTs trade on the millisecond scale, these computer orders can increase the price of the stock by many points before the Independent Investor or Retail Trader can place their order.
Recommendation services engage predatory HFT systems which are the primary cause of whipsaw trades for active Retail Traders.
Avoid the hassles and risks of “recommended stocks.” Learn a better way to find stocks that have a far better Risk to Reward Ratio, and will outperform any recommended stock. Visit www.TechniTrader.com Learning Center CLICK HERE.
Martha Stokes CMT
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Market Courses
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