The Bull Hunters Guide

Lately, we’ve been talking about the Federal Reserve. In particular, we’ve discussed how it’s set up as a governing body, and why knowing about them should be of real interest to each conscientious investor out there. In this entry, however, we’re going to begin to discuss the particular actions that are said to be the duties and obligations of the Federal Reserve. In other words, their very reason for existence.

Balancing the Economy

In the Federal Reserve’s own words, their job is to “promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long term interest rates”. What this means, essentially, is that their main mission is to regulate the banking system itself in order to ensure that the economy remains fair, balanced, and healthy. They prevent interest rates from climbing too quickly or moving too far out of accordance with how much people are actually earning.

( And during a Global Economic Meltdown, they seem to be running for the hills! )

The Federal Reserve also acts as a bank that other banks can make the use of. Just as you make use of your local bank, odds are that your local bank then makes use of the Federal Reserve in order to conduct the exact same type of business: making withdrawals, making deposits, and sometimes even taking out loans.

United States Treasury Account

Another distinguishing feature is that they also act as a bank to the government itself. The United States Treasury has an account with the Federal Reserve for the business of handling money transfers such as income from taxes, or making necessary government payments. In addition, the Federal Reserve also handles the issuing and redemption of government securities such as savings bonds and other such securities that you might be familiar with as an investor.

In addition, they issue all of the paper and coin currency that most of us make use of every single day. As you can see, if it’s related to the management and transfer of money, the Federal Reserve has their hand in it at some point along the process.

Next time, we’re going to discuss one of the Federal Reserve’s most important functions: the regulation of monetary policy.

See you next week for part 4 of Federal Reserve.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Investment scams aren’t limited to the fast paced interaction of bulletin boards, of course. Newsletters are another popular way to scam unsuspecting investors who are looking for a valuable tip on where to put their money next.

Newsletters Can Be A Scam

There are a lot of stock pick sites out there. Not surprisingly, each one claims to have the best strategy or formula when it comes to picking stocks. One of the most popular features of these sites is that they offer periodic newsletters, sometimes as often as one a day.

Some of these newsletters are legitimate, and actually offer the unbiased market advice that they claim to offer. However, just as many or even more of them are written by companies under the guise of a third party pseudonym to boost and promote their own stock!

Obviously, this can lead to all sorts of trouble. A legitimate company that was doing well in the marketplace through honest means would have very little reason to artificially inflate the value of their stock through disseminating disinformation in a newsletter. Any company with a future would also be wise enough to realize that this tactic is only setting themselves up for failure in the future.

In addition to the artificial inflation by paid companies, newsletters are also a popular place to run the pump and dump scam, offering what looks like a valuable tip, but is actually intended to ruin the investors who are duped into acting on it.

Newsletter Advice Things To Check

When you get an online newsletter that offers what looks like good advice, make sure of a few things. First, ensure that you actually subscribed to this newsletter. If it comes from an unknown source, you should delete it immediately, because it’s certain to be spam, and therefore certain to be a scam or at least a terrible waste of time.

Secondly, make sure that the newsletter you subscribed to accurately discloses who paid them to write it, how much they were paid, etc. Federal law requires this, so those newsletters who skirt around it are probably looking to hide something.

Lastly, proper grammar is critical. A professional newsletter might have a single typo, but it definitely won’t be full of misspelled words, use all capital letters, or endless streams of exclamation points.

See you next time when we talk about actual investment fraud.

See you next week for part 5 of Investment Scams.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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As we mentioned last time, we’re going to talk about the various kinds of scams that you might run into the world of investing; scams designed to separate you from your hard earned cash with false promises. The internet has given the people who perpetrate these scams a new lease on life by providing them with the anonymity needed to operate in secret and the technological means to target a much wider number of people than ever before.

However, just because the technology has advanced, the basic scams themselves are still fairly old. That’s the one thing that we have going for us when it comes to spotting investment scams: there are really only a few basic types of scam out there, and they just tend to get repeated over and over. Here are the most frequently seen:

The Pyramid Scheme

This is a scheme wherein money is solicited from investors in order to pay off previous investors who are now expecting to receive a return. Of course, such a scheme will eventually implode when the money coming in from new investors is insufficient to cover what is owed to the old investors.

Pump and Dump

This is a practical wherein a group of people purchase a stock, almost at random. They buy a large number of shares, and then they go about recommending that stock to as many as they can, usually thousands of other investors. When those people buy the stock, there is a sudden spike in the value of the stock. The duped investors will lose when the spike is followed by the inevitable fall, but those in the know will sell their holdings during the high point of the stock, thus making off with lots of profit.

In general, one should also beware of trades that take place in off shore accounts, because this is usually done to avoid operating in the jurisdiction of local law enforcement. They almost always are looking to hide something.

Next time, we’ll begin to take a look at some of the schemes in greater detail, beginning with the bulletin board scheme.

See you next week for part 3 of Investment Scams.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Lately, we’ve been talking a lot about short selling in this blog. In particular, we’ve been talking about the pros and cons of short selling, and last time I mentioned that there was a distinct dark side to the practice that causes many to cringe when they even hear the term. This time, we’re going to talk about exactly that.

Short and Distort

Short selling is a somewhat cryptic process that is rarely understood all that well by the amateur investor. Because of this, it creates a ripe opportunity for unscrupulous traders to take advantage of short selling and twist it into a market-harming “money making machine” that doesn’t respect the true meaning of free commerce and investing.

When this happens, investors resort to using a tactics known as the “short and distort”. The way it works is this. Imagine that you have a bear market. The prices of stocks are almost universally down, and prospects all around aren’t so great. Traders might take this opportunity to buy a bunch of short options in a stock. Of course, that in itself is perfectly normal and ethical. However, what makes the “short and distort” such a terrible practice is that the investors then go on to spread slander and lies about the businesses that they’ve bought shorts in.

Slander Is Believable

Obviously, in a bull market, everyone is already nervous and pessimistic. Slander is thus easily believed, and it’s easy for investors to cripple a company through these means. When that happens, they walk away from the smoking wreckage with a handy profit, purchased at the cost of their integrity as real business people.

Of course short selling has its dark side. So do all forms of investing. It’s the ease with which short selling can be exploited however that makes it a particular target for scepticism.

See you next week for part 8 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Over the last few entries, we’ve taken quite a detailed look at the process of short selling, or selling stocks that you don’t own under the agreement that you’ll actually put up the money to buy them at a future date. In doing so, your hope is that the value of the stock will decrease and that the price you have to pay is less than the money you received by “selling” them.

Short Selling Is Risky

Of course, this is a risky proposition. There’s an awful lot that can go wrong, especially if the value of the stocks that you’ve short sold happen to go up rather than down. Let’s take a look at some of the major risks of short selling.

First of all, there’s the matter of historical precedent. Historically speaking, stocks do tend to go up rather than down. It’s just a general rule of thumb that has applied to the market over the decades. Because the very nature of short selling involves the assumption that a stock will go down, you’re automatically working against historical precedent, so be aware of that.

Secondly, there is no limit to the potential losses when you short sell. Since you lose out on a short sell when the value of the stock increases, it’s entirely possible for that stock to skyrocket without limit. If that happens, you could quickly be ruined. On the other hand, the distance between the price you short sold for and zero is the maximum possible profit that you can gain.

Lastly, short selling automatically involves the practice of trading on margin. This entails the use of borrowed money, which is a risky proposition in and of itself even without the added dangers of short selling stacked on top of it. You might fall prey to sudden margin calls even, which is one of the most disastrous things that can befall a trader. Even if you’re right, it might take quite a while for your stock to decrease in value, and in the meantime, you’ll be sitting on short sold stocks bought on margin that are increasing in interest and ultimately costing you money.

Long story short, if you’re going to short sell, you need to be absolutely aware of all the risks that are involved. Of course, it’s not all about making of losing money. There are a lot of ethical concerns involved in short selling as well, that we’ll take a look at next time out.

See you next week for part 5 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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