Understanding Stocks

34 UNDERSTANDING STOCKS
to buy the stock), the workers (the insiders) in the boiler room sell their
shares for a substantial gain. By the time you want to sell, it is often too
late. More than likely, you’ll lose most or all of your investment.
A bit of advice: If a cold-calling salesperson begs you to buy a
penny stock, just hang up. “Hey, buddy, the stock is only $0.10 a share.
For $1000, you can buy 10,000 shares. If the stock goes to a dollar, you
could make $10,000. How does that sound? So can I count on you for
10,000 shares? Trust me, this stock is hot.”
It is reported that thousands of people fall for this scam every single
day. The boiler room brokers are skilled at making you feel that you
are going to miss out on the deal of a lifetime if you don’t buy in the
next 10 minutes. In reality, it’s unlikely that the penny stock will ever
claw its way out of the basement. (An entertaining movie called Boiler
Room described some of the tactics used to convince unsuspecting
investors to buy penny stocks.)
Like anything connected to the stock market, exceptions can be
found. There are a number of once high-flying companies that trade for
less than a dollar. Because of these companies’ history and book value
(how much the company is worth), they are generally better buys than
unknown penny stocks with no price history and negative earnings.
However, it is essential that you do your homework before you purchase
your first penny stock.
The SEC: Protecting Investors
against Fraud
You may wonder whether there is a government organization that
protects the needs and interests of the individual investor. Actually,
there is. Congress created the U.S. Securities and Exchange
Commission (SEC) in 1934 to regulate the securities industry
after the disastrous 1929 crash. The SEC is something like the
police officer for the investment industry. It sets the rules and
regulations and standards that Wall Street must follow. The purpose
of the SEC (paid for by your tax dollars) is to protect individual
investors against fraud and to make sure the markets are