The September 10, 2006 New York Times had a very interesting story in its business pages: A study found that individuals actually bought stock as a result of spam offerings of junk stock. Mark Hulbert, Stock Tips from Spam Aren’t Just Silly. They’re Costly. (Bu 6, September 10, 2006)
The spam, it turns out, was also a scam that duped a lot of people. The fact that people actually bought stocks on the basis of spam offerings really surprised the study's authors, Laura L. Frieder (Assistant Professor of Finance at Purdue) and Jonathan L. Zittrain (Professor of Internet Governance and Regulation at Oxford and Visiting Professor of Law at Harvard)..
Essentially, the study looked at a database of spam that was sent to e-mails over a period of time and which told people to buy off-market (or Pink Sheet) stock. The Professors noted that when the spam of a particular stock spiked so too did shares of sales of that stock as well as the price. On other days, the stock did not trade as much or as high. So, what’s the scam part of these spams?
It appears that the spammers first bought shares, then sent the spam in bulk, then sold the shares at a higher price while the recipients purchased it at that price. This, of course, gave the spammers a profit. As soon as they made their profit, however, the stock value bounced right back down to below the price at which the unwitting e-mail recipients could later sell.
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Hence, the spam was sent to create a spike in sales so that the spammers could make money off of other people’s decisions to buy the stock from the information in the e-mail. As a result of the investigation, the authors concluded that people actually buy shares of stock as a result of spam marketing, meaning that spam actually works a a marketing tool.
They also concluded that spam marketing of these types of stock is usually a method used to make a lot of money quickly by the spammers costing individuals a lot of money.
I know it should not surprise us that people are often naive and/or greedy when it comes to easy schemes to make money quick. Obviously the people who bought the stock rushed in out of greed without doing their homework. Had they looked before they leapt, they may even have learned right in the fine print, that the stock would be sold by the e-mail senders. Apparently, greed again overtook common sense.
I hope by now that everyone who reads this understands what I have said in other places and which you know in your heart is true: usually if it is too good to be true, i.e., some sort of get rich quick scheme, by the time you get in on it, you are not going to be the one who is getting rich quick. Skip the spam and instead, buy stocks the right way: after researching them.
And, with respect to spam in general, do not open e-mail from anyone you do not know: the person could be using you as a “zombie” and creating spam to your address book – that is one reason why it was hard to trace the exact “winners” in these spam scams. Plus, your friends may think that you are sending them the “stock tip.” It is a crazy internet world in which we live and we must police ourselves and watch out for ourselves. .