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Chat rooms are a great place to get a feel for the sentiments of other investors. But relying on chat rooms as a solid source of information about your investments is often a mistake. The possibility of misinformation is high, particularly if you haven't developed a "relationship" with the person who is posting. Here is a brief list of some of the more common comments that are misleading.
There is no question that market makers have a great deal of advantage in trading stocks.
But market makers have nowhere near the amount of control that chat room writers attribute to them. Although market makers always have the ability to make money off of market orders, they cannot control the placement of limit orders.
If everyone only used limit orders, market makers would have absolutely no control over the price of a stock. The only time market makers can influence the price of a stock is when market orders are placed.
When that happens, the market maker must fill the current BID or ASK order they receive, up to the amount of the BID or ASK size placed. After filling the SIZE, they are free to make purchases or sales by adjusting the BID or ASK to any price they want. But every execution comes only when they post a BID or ASK price.
This means they constantly adjust the price of their current BID or ASK based upon the order stream they see on at Nasdaq Level II. As each BID is filled for a current market SELL order, and there are more SELL market orders in the queue, the price drops.
An overabundance of market SELL orders is what drives prices down.
Normally, market makers are attributed with "driving the price down" during the opening half-hour, to "pick up shares cheaply." There are plenty of charts you could point to that support this viewpoint.
But the only way prices decline like this is when sellers place market orders. Lowering the BID does not force anyone to SELL their shares.
And you can't blame market makers for decreasing the BID when there is a huge crowd standing in front of you screaming sell and no one screaming buy.
Market makers admittedly, by virtue of their position in the market, have an advantage. They are watching the flow and volume of orders in the queue. If BUY market orders equaled SELL market orders all the time, the market makers can make the spread continually, without any risk. They don't need price movement to make money.
So when you see a chat room entry like "Market makers driving the price down!" because of a sudden sharp decline, check the transaction history. It is almost always an overwhelming list of transactions at the BID, or market orders.
What it really means is that a lot of other people have decided the stock needs to be sold, immediately! Rather than blame market makers, you would be better off wondering why those other people think that way.
Lastly, try finding a chat room entry that blames a sharp upward price rise in the first half-hour on "market makers driving the price up! - Hoorah!" You won't find it. They get blamed only for the declines.
Yet if they had the ability to control the downward price movement, they would surely control the upward movements as well.
This one is found most often in low-priced stocks that are struggling.
There is simply no rational reason to believe that a stock selling for $2 will go to $4, any more rapidly than a stock selling for $20 will go to $40, or a stock trading at $100 will go to $200. Despite the sort-of common sense feeling that "it is only $2 more", there really isn't any lasting logic behind this.
Nevertheless, hope springs eternal. And while $2 stocks do go to $4, $20 stocks go $40 with pretty much the same frequency.
In fact, the real problem with $2 stocks, especially if they used to be $8 stocks, is that they often go to $1 pretty quickly.
If you really want a stock that is going to double, you need to find a good story that hasn't been widely told. The best indicator of that is low volume, not low price.
There is some kind of mystical association of press releases with breakouts of a stock price.
And while it does happen, it rarely happens when you know a press release is coming.
Information travels fast and far. It is far wiser to assume that if you know the press release is coming out, so does everyone who is interested in the stock.
There have been many examples of this with the announcement of Web sites. In a press release, a company states that its Web site will "go live" on Monday and chatter assumes that the release will drive the stock up. But everyone already knows what's in the release. After all, it's in the chat room.
There are times when a press release causes a daytrading flurry, like with Pink Monkey (PMKY) stock back in December 1997. This little company issued a press release saying it was "the next Amazon.com." The stock went from $1 to $17 a share in two days.
But the day before the press release, this stock traded only 100 shares. On the day of the press release, which was issued at noon, no shares had traded before the release. Everyone was caught by surprise, including the President of the company.
As a general rule, if you know a press release is coming, forget about it having an impact on the price.
Nine times out of 10, the news inside is not about the stock in question. It's usually SPAM about some other stock you never heard of urging you to "Get in now!"
Please, spare us. Strangers who want to make money for you seeking nothing in return?
In all likelihood, the spammer simply wants the stock price to rise so he/she can sell shares, to you.
There may have been an online revolution in investing, but so far there hasn't been one in human nature.
At Briefing.com, we don't have anything against chat rooms. They serve a valid purpose. But you have to filter what you read and learn in the chat room.
Unfortunately, as the Internet has grown, some chat rooms have become virtual battlegrounds where individuals fight to prove they are "smarter" than other readers. All it takes is for two people to start calling each other idiots to make the filtering process extremely tedious. At Briefing.com, we simply don't have the time to read or follow chat rooms, largely because of this problem.
In the end, the best information in a chat room usually comes from someone you have gotten to know, electronically or otherwise, over a period of time. Acting on information found in chat rooms posted by a complete stranger, without verifying it in some other way, is about as risky as it gets.
Robert V. Green