February 7, 2010 in Business

Agency warns investors to avoid ‘green’ scam

Universal Press Syndicate
 

FINRA, the big regulator of U.S. securities firms, has recently addressed a new threat to your financial well-being: the green energy investment scam.

This is a twist on the traditional energy (i.e., oil and gas) scam. The promoter convinces you that given the rise of solar, wind and other alternative or renewable energy sources, some tiny stock has a game-changing technology, a huge untapped market or a big government contract about to fall in its lap. The idea is to get enough people excited about the stock that they’ll pile in and push up the price of the thinly traded issue (typically a penny stock, trading for a few dollars or less per share). This gives the promoters a chance to exit their position at a big profit. Hence the term “pump and dump.”

To spot such scams, look for:

•Unsolicited communications (from snail mail to tweets, and more).

•Predictions of swift and exponential growth (a surefire 367 percent gain in the next two weeks!).

•No actual product on the market (but the prototype’s almost ready to go!).

As the government showers money on alternative energy projects, some half-baked schemes will suddenly seem plausible, even profitable. It’s important to keep your wits about you. Learn more at www.finra.org.

Ask the fool

Q: What’s the difference between “growth stocks” and “value stocks”? Which kind should I invest in? – M.S., Dallas

A: The adjectives “growth” and “value” are often not that meaningful and aren’t even exclusive of each other. After all, an ideal prospective investment would probably be increasing sales and earnings at a good clip (growth!), and would also be priced a fair amount below what it’s really worth (value!). A company that is increasing sales or earnings significantly may be dubbed a growth stock, and if its stock price ever seems undervalued, it might be deemed a value play. Look for both value and growth when investing.

Q: Do I have to buy 100 shares at a time of any stock I’m interested in, or is there some way for me to buy odd lots (say, 10 or 25 shares) without paying a lot of extra money? – K.E., Elyria, Ohio

A: Most brokerages don’t restrict how many shares of stock you can buy. You can buy 17 shares, or 83 shares, or even just one share. You should pay attention to what percentage of your investment is going to commissions, though.

If you’re spending $250 on 10 shares of a $25 stock but are paying a $20 commission to your broker, then that represents 8 percent of your investment, which is too costly (20 divided by 250 is 0.08, or 8 percent). Aim to pay 2 percent or less in commissions. If you buy $1,000 of stock in a company and pay a $20 commission, that’s just 2 percent. Some brokerages sport commissions as low as $8 (sometimes lower) – with a $400 investment, an $8 commission is just 2 percent. Learn more at www.broker.fool.com.

My dumbest investment

Some years ago, Starbucks was trading around $14 per share. At the time, I thought paying $2.50 for a cup of coffee was the dumbest idea I’d ever heard of when regular coffee at a deli was only 50 cents. So I shorted Starbucks. By the time the stock hit $20, I had learned a valuable lesson: Don’t short something just because you think it’s a dumb idea. Millions of other coffee drinkers disagreed with me. It just proved to me how dangerous short selling is. – K.D.S., Leonardo, N.J.

The Fool responds: Short selling can be profitable, but many great investors succeed without engaging in it. When you short, essentially betting against a company, you’re betting against the overall long-term trend of the market, which is up. You have the company’s management working against you, too, as they aim to prosper. Also, the most you can make on a short is 100 percent, if the stock falls to zero (unlikely), while you might make 200 percent or more investing in some stocks in the usual way. Learn more at www.fool.com/specials/ 2001/sp010621.htm.


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