Today Shadowtraders Barbara Cohen and James Horne launched their first editorial.
They can be seen in The Latest Magazine. Their article is called "Pumpin and Dumpin"

It is reprinted here.

We daytrade for a living. We spent years being on the short end of the stick trying to get the “straight scoop” on investing. We decided to share our experiences with you. This may help you spot snake oil.

…And there’s a lot of snake oil out there.

Any of you ever invest in the stock market with a full-service brokerage firm? If you have, you were probably assigned your own “personal” stock broker. That may have been the start of a profitable relationship for the brokerage, but not necessarily for you.

Let me ask you a question here. How do stock brokerages make money? Probably your first response is… they make money on commission. While that is true, if you look at the quarterly reports of many of the larger institutions, commission does not rank as their primary income. Brokerages really make money on arranging Mergers and Acquisitions, Underwriting (the process by which a brokerage raises capital from its investors on behalf of a company), and IPOs (Initial Public Offerings). In exchange for these services, brokerages are compensated not only in cash, but also in shares of stock.

Here’s how they make their profit:

Brokerages and stock brokers all know one thing, the stock market moves on news. When there is good news, the market goes up. When a company is being underwritten or acquired by another company, the market definitely considers that “Good News!”

The brokerages all know this. As soon as they decide to underwrite a company



or arrange an acquisition, they release this information to the news wires. Within minutes, it’s all over the Market. The company’s stock value quickly rises on the emotion of the news.

The brokerages know another thing, emotion is short lived and so is the rise. They know they need to sell the shares they received as fast as possible while the news is still hot. This maximizes their profit – not yours (otherwise, they may be in the stock for the long haul).

So what happens. The brokerage tells its brokers that they have each been assigned a certain number of shares. Either the brokers sell the shares to their clients or buy the shares themselves. Brokers get “REAL MOTIVATED” at this point and start making calls. Part of their spiel is: “buy now, the stock is moving up, the opportunity won’t last, blah blah blah”. Unfortunately for you, the investor, by the time you hear about the opportunity, the stock has probably already reached its peak. In essence you by high and you are now the one in it for the long haul.

How do you protect yourself from “Pump and Dump”? Simple. Anytime your stock broker phones you up and says “I’ve got a deal for you”, thank your broker for the opportunity and say “I’ll get back to you” and hang up. Clunk!

The problem is you just don’t know if the stock broker is calling you because it is a legitimate opportunity researched by the broker, or the call is because the brokerage wants to rapidly liquidate inventory. Saying “I’ll get back to you” gives you the chance to see for yourself. This works even when the broker is your golfing buddy.

Here’s a quick way for you to know just what kind of broker you have. Call back in a day or two and ask if the shares are still available. If the broker says no, understand you have just avoided being a chump. Why? If it really is a legitimate deal, you can always go back to the market and get more shares.

A couple years back we inherited an account and along with it the account’s broker. He phoned us up, gave us the usual perfunctory condolences, and said “I’ve got a deal for you”. He told us that he was getting all his customers into this particular stock. The stock was moving up. He wanted us to buy 1000 shares. He had no idea we knew anything about the market. He assumed he would be able to continue making money with this account as he always had. We thanked him for the opportunity and told him we’d get back to him. We hung up.

He called back the next day. He was very motivated. We told him we never buy stock in drug companies. Why? Because with drug companies you just never know if you will





wake up the next day and find that the FDA has taken the company’s drug off the market or that the new wonder drug was not getting FDA approval.

At the time the stock broker was offering us this opportunity, the stock was selling for $63 a share. A very short time after we declined his offer, it was revealed that the company had withheld that their drug may have been associated with heart attacks. The stock plummeted from $63 a share to $23. Had we not understood “Pump and Dump”, we would have lost over $40,000 and not even had the entertainment value of losing it ourselves. To this date, the stock has never recovered.

Barbara Cohen and James Horne are co-founders of www.shadowtraders.com. Shadowtraders delivers seminars to teach investors how to consistently trade Financial Futures. Barbara and Jim have developed trading strategies for individuals that are similar to those of the larger institutions trading in the market today. In their seminar, they introduce trading techniques that can help make anyone (novice or seasoned professional) a more profitable trader. Barbara and Jim can be reached at (727) 449-1300 or by email: TheLatest@shadowtraders.com.