Elaine Jackson just had a visit from her cousin Phil. He wanted to apologize. La

Question

Elaine Jackson just had a visit from her cousin Phil. He wanted to apologize. Last year he had regaled her with stories about a small company he had discovered that had just invented a high-tech converter to allow cars to run on water. It was still all hush-hush. The stock was trading for just one penny per share. He had put all his savings into it, and he wanted to share the tip with her. She purchased stock using $8,000 that she had been saving for two years. Later, when her money was long gone, she realized she had been the victim of a classic "pump and dump" scheme whereby unscrupulous promoters bought up "penny stocks," starred a rumor about big profits, and when enough suckers bought in and the stock price shot up, the promoters bailed out and made a profit. Phil had just gotten out of prison, and he felt terrible about what he had done. Elaine had learned an expensive lesson. Requirements 1. Why were Phil's actions considered to be fraudulent? 2. Does the current market price of a share of stock give any indication of the value or success of a company? 3. What sort of information should an investor look for before deciding to invest in stock of a company?

Explanation / Answer

1. Phil, knowing that the Company had no base, yet made Elaine invest therein, understanding that sooner or later the Company would shut shop. This activity is considered criminal in nature, and hence fradulent. Phil is knowingly or unknowingly a part of the "Pump and Dump" scam which was propogated by the Company's management.

2. The current market price of the share of a stock only provides information about the base which the stock has in the market. The indication of the value or success of a Company can only be obtained from its financial statements, which should be signed by a valid auditor, and which signify the correctness and accuracy of the financial structure thereof. The success story of a Company is also measured by its goodwill, which it has managed to gather over the years, based on the customer relationship.

3. Before investing in the stock of a Company, it is very necessary to assess and study the financial statements thereof, since they give a clear picture regarding the near accurate financial position of a Company's activities. Further, the market share of the Company's products, its price range, product sustainability and information pertaining to the debts thereof, also needs to be reviewed before making any investment decision.

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