The Latest News From The Motley Fool: Penny dreadfuls

FOR THE first time, a Fool has testified before the US government. At the beginning of last week, Tom Gardner, one of the co-founders of the Motley Fool, testified before a US Senate committee on penny stock investing and daytrading, among other things.

Neither of these are new phenomena, but the rise and rise in personal stock ownership that has been brought about by the explosion in internet use has lent them a greater prominence. And whatever is topical in the American stock market will very shortly be topical here too.

For many of us in Britain, the internet is already changing the way we look after our own investments. Company information available over the web is improving all the time and with three real-time share dealing services already online (Barclays, Charles Schwab and Stocktrade), the gap between the professional and the amateur is shrinking rapidly.

We can expect to see a major shift in patterns of personal investment in the next several years, with the balance of power swinging towards the individual with a humble home computer (whose price, of course, is shrinking all the time).

The first thing Tom talked to the US senators about was penny stocks. At the Motley Fool UK, we actively discourage discussion of shares with a market capitalisation of less than pounds 30m or a share price less than 50p. The financial and background information available on such companies is often limited and they have little liquidity and a limited float (few shares available for public trading), which means the price can be artificially inflated, for a short while anyway. This volatility recreates the thrill of a casino, with about as much chance for the investor to turn a long- term profit.

Fearful doomsayers flock to any revolutionary innovation, and so it is with the internet, in particular in relation to penny shares. The fear is that the internet will be used to "ramp" or hype such shares. In our experience, this is actually less of a worry online than off.

The internet makes it harder for malefactors to get away unseen. Unlike telephone or personal contacts, internet scams leave themselves open for rebuttal by others in online communities, such as that of the Motley Fool.

It can be hard to ramp a share in a chat room, for example, when hundreds of others can easily challenge the promotion, demanding evidence and the source of that evidence in their search for a hidden agenda. If every investor had access to this public dialogue, made possible only by the internet, then the misdeeds of hypesters, crooked brokers, financial advisers intent only on maximising their own commission and other ne'er-do-wells would be fodder for the mockery of the people.

Perhaps most importantly, though, internet messages leave "footprints". They can provide all the clues to a crime; clues that Arthur Daleys can never be sure the authorities won't find.

And then there's daytrading. This is the phenomenon where investors hold shares for only hours or even minutes at a time, aiming to profit off short-term price fluctuations. In the US, daytrading "parlors" have been set up and some people have even left their jobs to daytrade.

It is not a new phenomenon, but for the vast majority of people it has always been and will remain deeply unprofitable. The incentive to manipulate share prices by spreading rumours and half-truths is undoubtedly strong for the daytrader and this is just one reason why we actively discourage it at the Fool.

There is no doubt, however, that as online share dealing takes off in Britain and charges decline, some people will be tempted into it. That's a shame, but our response is to offer education to combat ignorance, not to condemn the internet out of hand.

Is there danger for the unwary investor on the internet? Yes, definitely. Is there danger for the unwary investor in the offline world? Yes, definitely. Does the internet represent an unprecedented opportunity for individuals to take control of their own financial destiny ? Yes, definitely.

If you're worried about using the internet to help you invest, ask yourself if the term "unwary investor" applies to you. If it doesn't, you have no worries. If it does, you have a little Foolish work to do before you start managing your own money.

www.fool.co.uk

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory