Spam E-mails Promoting Stocks Work
3 September 2006I frequently get spam e-mails advertising various stocks as being the next big thing. They’re usually tiny penny stocks no one has ever heard of, and usually the spam is pretty obvious - a few weird poetry quotes in the title of the e-mail to get past the filters, and then some random information on a stock in the body. I always delete them myself - but it turns out somebody out there is reading them - and buying the stock. Financial Rounds, a blog by a finance professor, has a post on how a study has just shown that these spams are actually affecting the stock price. The person promoting the stocks, or the “tout,” buys the stock and then sends out a bunch of spam e-mails. The volume of trading along with the price of the stock show huge gains the next day, as the spammer sends out a bunch of e-mails to people. Then the spammer sells out, pocketing gains from the run-up in price he caused.
Sounds great? Getting a spam means the stock is going to go up, so you should buy in! Wrong - people who do that lose money:
Selling by the spammer then results in negative returns following touting. Investors who respond to touting are losing, on average, 5.25% in the two day period following touting. For the quintile of stocks in our sample that are touted most heavily, this 2-day loss approaches 8%.
Frankly, I’m a little disappointed in humanity to know that people would actually buy a stock based on a spam e-mail advertisement. You shouldn’t be one of them - there isn’t a good reason to do it, because you’re always going to be on the tail end of the buying, risking a loss as selling starts. Even if you want to trade penny stocks, you don’t want to be doing it in the wake of somebody else who’s manipulating the price. They gain money by taking it from the suckers who read the e-mails - namely, you.
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