Wolf of Wall Street or the Pump and Dump scheme

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If you haven’t watched the movie I would just like to warn you specially if you are not used to see obscenity and nudity.

Also the movie is not entirely about the stock market. If ever you have already seen the movie I hope you are not dissuaded about the evil things that allegedly greedy brokers do.

But the movie does tell some facts about the stock market like:

  • You lose or earn only when you cash in your stock holdings
  • Greed will destroy you thus the maxim “tame your greed”
  • Don’t just follow the bandwagon do your due diligence
  • Invest only on strong and fundamentally sound companies
  • People will do things just to earn money even to the point of defrauding the investor through pump and dump scheme

Let me explain these to you so that you have a better understanding about what really happens in the stock market.

YOU LOSE OR EARN ONLY WHEN YOU CASH IN YOUR STOCK HOLDINGS

In the beginning of the movie Jordan started as an assistant in a brokerage firm and he met the boss. The boss explained to him how they make money, which is via commission. In order to continuously earn commission the boss told Jordan not to make the investor withdraw the money, but instead keep on rolling by re-investing the principal and earnings. Thus the key for them is to keep on feeding investors of information about new stocks that could give them more profit thereby giving brokers more commission.

There is nothing wrong with re-investing, but if you heard the boss, he was right when he said that what investors see is paper loss or profit. Unless such is realized, that is the only time that an investor actually lost or earned. Such will be realized when you cash in your investment. If your investment appreciated good for you when you cash it that means you are getting back more than what you originally invested. Bad for you if you cash it when you already suffered losses. Such losses won’t be recovered anymore.

Greed will destroy you thus the maxim “tame your greed”

Meaning you got to sell your stock holding when it reaches your target. In the story Jordan was given a chance to start over life, but he just can’t let go of what he has built. Also , besides the fraudulent stock transactions he did he even made transactions beyond his brokerage firm only to gain more and in the end he lost lots of things.

The same is true in the real stock market. That is why it is advisable to establish your target selling price even before you buy the stock. Setting your target price acts as a gauge at the same time a goal that you want to reach. Once you reach or go near that goal you should start selling it in order to avoid greed. It will be hard to let go, especially if stock price keeps going up but again, it is better to profit from it at your desired price rather than wait and wait and then only to lose when the stock price suddenly drops down faster than a speeding bullet. As they say the higher it goes the faster it goes down.

Don’t just follow the bandwagon, do your due diligence

After the crash in the story penny stocks started selling. Jordan joined a small brokerage firm selling penny stocks to any people they know. When Jordan started he convinced one of his former contacts to buy a penny stock using flowery words to enticed to buy.

Yes don’t invest in the stock market because you heard a miracle story where a barber invested in stock and became a millionaire next day. Don’t just believe in what brokers, news, people, or groups say; you got to do the leg work. When that scene was shown in the movie my sister said “that is why I hate salespeople”. I am not putting down our dear sales persons, the problem is that these sales people are just like us only that their living comes from the number of sales they make. Thus, at times they say words that would really entice you to buy even at times to the extremes.  Yes entertain and listen to such sales people, news, groups, etc. But don’t ever, ever just rely on it. In stock investing, you call the shots and it’s your money so before you invest in a certain stock do your due diligence.

 

Invest only on strong and fundamentally sound companies

Again the story revolves around defrauding investors offering penny stocks. Such stocks are speculative meaning we really don’t have the assurance of their stability. I am not saying that they are not good, but the likelihood of it becoming big is slim.

Thus, it is always advisable to put your money into stable, well-tested, well trusted, and fundamentally sound companies. Stable in a sense that it has a track record of consistent good operation even in bad times. A company that continues to redevelop itself and is tested to withstand what ever windfall may come has a better chance of facing new and future financial crisis. Of course you invest in a company that has managers that you can trust. Lastly, you put your money in a company that is capable of paying its debt and keep operations, which in turn will deliver profit for the coming years.

 

People will do things just to earn money even to the point of defrauding the investor through pump and dump scheme

It so happens that the lead character of the story did do a pump and dump scheme. By pump and dump it is a way to keep feeding the public investors buying a stock, thereby creating a hype which will end into its price rising up. With that lots of investors will try to catch up with the trend and thereby a great demand arises. Then the same people who initially created the “pump” on the stock’s price now sells their holdings to profit from it thus “dumping” their holdings. At times the number of stocks they sell is so huge that in a short time period the stock’s price drastically plunge due to the oversupply of the stock.

That is why be on the look out. People are people, thus each wanted to get rich quick and it’s our nature to want to get rich quick even to the point of trampling on others. We witnessed so many financial scandals here and abroad. Such scandals created trauma and thus most are now hesitant to invest. But if there will be no investment our economies will halt, thus there is a need to keep finances rolling. Money is never meant to be tucked under your bed. Money itself is not evil, but rather the love of money. So don’t hold back investing only that this time be wiser by doing your due diligence and investing only on the best investment.

Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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4 comments for “Wolf of Wall Street or the Pump and Dump scheme

  1. January 31, 2014 at 5:41 pm

    Brokers and market makers really do the pump and dump. With this in mind, new traders should really be careful, while experienced traders can ride the pump or dump.

  2. Gerard
    February 25, 2015 at 10:26 am

    Fix your grammar first

    • February 25, 2015 at 10:45 pm

      Thanks Gerard for the reminder. I do need to work on my grammar. My high school seminary teacher will surely scold me for letting my grammar become dull. I need to practice more and practice to leave whatever I write over night so that I can have a clear mind to edit my work. Again thank you for reminding me.

      • Emil
        February 13, 2016 at 2:44 am

        Grammar? Who cares, the article has lots or real life application anyway. No need to be smug about it.

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