An important questions that many investors have is the following: is stock trading a scam, or is it a legitimate activity?
Strictly speaking, let’s make it clear that trading stocks is a legal activity as long as you FOLLOW the laws. However, there are many things around the stock market that can also be qualified as a scam, if you really start to think about it.
Let’s see some of these characteristics.
Stock prices are based on expectations, not on reality.
While some of the price of a stock can be traced to intrinsic economic and financial results, a lot of the stock price is really based on expectations about a company which can be manipulated.
For example, some companies develop technologies that are unproved, however investors will assign a high stock price based on what they expect for possible applications.
Another example is when a company is expanding and investors make the assumption that it will acquire a large part of the market. While this could happen, it is far from being a reality. Many investors fall pray of these tactics.
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Stock prices are dependent on unpredictable external events
Just like gambling, stocks prices may be the result of unpredictable events. For example, a war somewhere in the world can change the price of oil companies.
The possibility of such changes means that stock trading is not in any way scientific, but it is in some scale similar to a gambling game. Not as bad as a cassino, but also very subject to luck.
Stock Prices can be Influenced by Powerful People
Another characteristic of stocks that make them similar to a scam is how prices of individual stocks can be affected by people. For example, a company can easily double in price when somebody in another big company decides to buy its shares. While its ilegal to profit from such information, the insiders themselves know fully well what’s gonna happen, so they can buy or sell company shares as these negotiations happen (as long as they comply with some basic regulations).
Another group of people who trade on information is the US congress! They can create and vote for laws that impact companies and at the same time buy shares in their stock.
A powerful investor like Warren Buffet or a hedge fund manager can go into a company and learn whatever they want and then legally invest their money in the company. This kind of insider knowledge is not available to retail investors, because why would the company give you this information?
Finally, stocks prices move based on who has money to buy or sell stock. If a stock is going up, somebody very rich can easily go and sell a bunch of stock to make the prices retract momentarily, just to start buying again the same stock when retail investors had sold their holdings. This is such a common manipulation that big banks do it all day long.
