I don’t see a lot of spam these days as my spam processing days are behind me. However, from time to time the individual analysts on our team point me to recent trends.
This past week, in some of our feeds, we have seen a lot of stock spam with subject lines like “CALL YOUR BROKER RIGHT NOW!!!” We’ve seen new outbreaks of this type of spam every day.
Stock spam was a huge problem when I first started 7 years ago but in recent years it has diminished. The idea behind this type of spam is that a spammer purchases a big chunk of a penny stock traded on an obscure exchange (read: anything other than the NYSE and Nasdaq) then sends out this spam run. When suckers receive this mail, their greed kicks in thinking that they have received a tip. They go out and buy up shares.
The investors, of course, figure that as soon as the institutional players notice how great a company this is, they will start buying up shares in this penny stock and drive up the price. The investors can then get out, keeping for themselves a tidy profit. It’s their scheme to get rich… and quick!
Unfortunately, what happens in life is that the spammer has taken a position in the stock days or weeks ahead of time. When they send out the spam run, investors purchase the stock in droves. Because of this supply and demand, their buying pressure drives out the price of the stock and the spammer, who already has a position, gets out after the run up. When the buying pressure dries up, the stock returns back to its normal price. The traders who received the spam are stuck with a low priced stock that costs way more than they paid for it, and will never go up in price. The big players will never buy the stock and it’s low for a reason – the company sucks.
This action is quite illegal for two reasons. First, spamming is illegal. Second, stock manipulation (front running) is completely illegal and many people have gone to jail for this. People who write about stocks usually disclose whether or not they have a position in the stock before they tout it. If they don’t, the SEC frequently comes knocking on their doors.
Stock spam has declined in popularity during the past few years, giving way to more pharmaceutical spam, malware and random products. I think the reason it is less popular is because of the reasons I mentioned in the previous paragraph, and other types of spam are more profitable, and because organized crime does not want to draw the attention of law enforcement. Government authorities have experience tracking down market manipulators and they want to stay off the radar.
Regardless, people shouldn’t be buying stuff they find in spam adverts, let alone hot tips. Hot tips don’t come to ham-and-eggers like you and me. By the time it comes to us, it has already been acted on and priced into the market. You can’t make money off of them.
When it comes to stock spam, I have one piece of advice for people – Penny stocks are very low priced securities that cost significantly more than they are worth.