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TL;DR – Beware of stock gurus promising live access to their stock trades in a private chat or video server. They may be front running their stock trades.
I’ve seen ‘stock gurus’ hawk their expertise on Facebook and the Internet. They usually offer a monthly subscription package where you access real-time alerts and see actual stock trades in action. They even highlight individual stocks. Pretty exciting for the investing novice, right?
They may even couch it as a tutorial, spreading their astute investing knowledge to those willing to pay for the privilege. They’re helping newcomers to the investing sphere, and getting them started in stock investing! Stock investing is so complex and they’re simplifying it and making it accessible. Hail to the stock gurus!
How It May Work
This ‘service’ doesn’t come free. Obviously, there’s the monthly fee to access their website, their stock alerts, and their chat/video server where one can participate in trades as they happen in real time. The stock gurus may actively coach or coax them to make stock trades at the same time, under the guise of helping them out.
Let’s do a simple scenario; A stock guru uses a stock screener. From the stock screener, he can cherry pick a stock that has modest daily volume or liquidity. He probably has an ideal daily volume number in mind. He may even return to the stock every once in a while. He blasts out an alert to his subscribers, saying that he will purchase shares in this selected stock.
Now in the chat room, the stock guru usually has a computer screen running and generates enthusiasm for his pending stock purchase in this selected stock. He may generate a buy order of 1000 shares. 2000 shares? Only he knows, because he knows the daily volume for this selected stock. He clicks the BUY button! Excitement ensues!
In this chat room, there may be a multitudes of novice stock investors watching his moves. They are learning from this stock guru. They may even have their stock trade screens up and running. The stock guru may even encourage his participants to follow along with their own trades. He may even coax them to make small trades, such as 10 or 100 shares, telling them that real-world experience is needed.
Then, just when the initial buying euphoria begins to fade, the stock guru sells off his shares in the selected stock. He may hold it for a few minutes. He usually will have made a decent amount of money in doing so. The investing novices will in turn, sell off their stock holdings. The novices may not make as much money as the guru did, or lose money altogether.
The Dark Secret
The key is that the stock guru has specifically selected a stock due to its favorable daily volume. He may also have a secondary criteria such as price, to factor in the stock selection.
Let’s say the stock guru bought 1,000 shares in this selected stock. He knows that his purchase may eventually increase the price of the shares he is buying, but not by that much. The stock price change in this initial purchase may go up by 5-25 basis points.
It is the subsequent collective action of his local chat room that will push the stock price even further. Let’s say the stock guru has 100 participants in his chat room. Let’s assume that he has a 90% conversion rate; the novice investors need to invest to learn about the stock markets, and they need to participate accordingly.
That means 90 individual investors may have bought shares in this selected stock, pushing the price higher. Even if they bought 10 shares each, that is 900+ shares that will follow the stock guru’s initial purchase. The price will go up. The stock guru will see the price action and usually can time his exit – he may even listen to clues that participation in the chat room is winding down. He clicks on the SELL button for a nice profit.
The participants in the chat room will then start to sell their shares. Selling pressure will bring the stock price down and individual participants will start to lose money. Not bad for a few minutes work, day-trading a stock!
Front Running
This is called front running. A speculator buys a stock lot, knowing that there will be a spike in volume that will push up the prices for that stock. I actually learned about this in an Amazon review, of all places! A stock guru was touting his book, and a scathing review highlighted the potential stock front running scheme he may be using. I love learning about the stock market from unexpected places!
Day trading is a difficult job. A speculator cannot time the market. I am of the belief that technical analysis is of no help. I understand that novice investors want to trade in the stock market and to make money. The stock guru is not one of the experts that novice investors can use or learn from. Their websites do not offer much value for the money. They can’t day trade, either – they may be using a variation of front running to help them out.
Conclusion
Stock investing requires knowledge and education. Yes, it is simple to buy and sell stocks. Just click on the buttons. There are no shortcuts to stock investing. Granted, the bull market is a nice shortcut as day traders appear to do well. It is more difficult to know HOW to buy/sell stocks.
But when the music stops? The bear returneth? A sideways market? That is when you need that investing knowledge, temperament, and acumen to navigate difficult stock markets.
The best way to learn is to gain the necessary education yourself. Dive into financial forums, and ask questions. Read up on stock investing knowledge on various websites. Read articles in mainstream media about stock investing. Do simulated trades in paper trading accounts. Read a couple of books. Talk to that friend who seems to know the markets. Etc. I wish you luck.
The usual disclaimer applies; This blog article is for entertainment purposes only. No express or implied warranty is offered, regarding any actionable information contained in this article. Laws governing investing are complex and varied. Personal finance is personal to you – no one else knows about your financial situation intimately. I encourage you to read and study information from other financial sources to gain the knowledge and expertise needed to manage your finances.
