Unlike foreign currencies which trade in a huge, global marketplace, stocks of small companies can lend themselves to manipulation and fraudulent practices more readily. The primary reason for this has to do with the nature of the stock market and the comparative lack of liquidity which does not usually present an issue in the currency market because of its size and depth.

As a result, stocks tend to be more carefully regulated and monitored by agencies such as the Securities and Exchange Commission which was founded in the aftermath of the huge stock market crash of 1929. A variety of different fraudulent practices involving stocks are listed in the sections below.

Corporate Fraud

Corporate stock fraud usually involves officers of the corporation disseminating false or misleading information in order to increase the value of the company’s stock. They do this in order to later sell the stock at the artificially inflated price. Enron was a classic example of a corporate stock fraud.

Other ways that corporate executives perpetrate fraud to manipulate the stock market include: making large purchases amongst several colluding investors in order to make the stock appear to be under accumulation by third parties. This might then prompt other investors to buy the stock at inflated prices.

After taking the stock price higher through these pre-arranged transactions, the stock is subsequently dumped by the perpetrators at the inflated price. This falls into the general category of a “pump and dump” stock scam.

Churn and Burn

Another type of stock fraud involves unscrupulous stock brokers that overtrade in their customer’s accounts in order to charge an excessive amount of commissions. This type of fraud is widespread and is not particular to the stock market.

Any financial market where a broker performs executions of financial instruments, especially on a discretionary basis, is subject to this type of fraud. Unfortunately, many people have no idea their broker is doing this if they have given the broker power of attorney over their account and do not monitor it closely.

Pump and Dump

This form of securities fraud has become especially widespread since it now often uses the Internet for the pump part of the scheme to artificially inflate a stock’s price. Con artists employing this scam disseminate fraudulent information via chat rooms and by spamming people’s e-mail accounts.

The false information will typically produce a rise in the stock price. At this time, the fraudsters dump their stocks and the subsequent investors lose out. This type of stock fraud works best with thinly traded and illiquid stocks that have little public information available about them.

Insider Trading

This type of securities fraud is performed by the corporation’s key personnel, directors and holders of a large percentage of the outstanding stock or other corporate insiders.

Basically, the fraud involves such insiders who trade on information which is yet to be made public. This might include such things as a pending corporate takeover or a disappointing earnings report, for example.

Other Stock Fraud Situations

Corporations can sometimes “cook the books,” which involves the corporate accounting of the firm, making it appear the company is doing much better than it actually is, making the stock price reflect the distorted information and defrauding investors. This sort of fraud came to light recently in the huge Refco case that forced the company into bankruptcy shortly after its Initial Public Offering or IPO.

Shorting stocks, which involves borrowing stock in order to initiate a short position, can also be fraudulent if done with the intent to profit by subsequently disseminating false or misleading information to make the market in the stock drop. “Short and distort” is the common term for this sort of stock fraud.

I believe politics and government will affect the economy significantly. With our current economic crisis and the people’s belief that the government must “do something,” I think we’ll see a lot of intervention.

During the fall crash, it was primarily a deflationary moment. While gold did decently as a safe haven, most commodities crashed along with the stock market. The dollar and treasuries roared. People bought dollars to deleverage their debt (which was primarily in dollars) and bought US treasuries as a safe haven investment (which also increased the value of the dollar). I believe these actions were misguided and the opposite will be the case in the future.

America is a society drowning in debt, and the signs point the society will become more deeply in debt. Government debt is approaching 100% of GDP. This in of itself is not terrible; however, the deficit itself is about 20% of GDP this fiscal year and I think it will likely stay as high as 10% of GDP. Even though the government will likely do less stimulus programs in the future, the unfunded liabilities of medicare and social security will take their toll.

Besides government debt, people and corporations are drowning in debt too. The US government debt had been primarily bought by foreigners, particularly China, since the US people didn’t have the money to loan to the government. However, China will likely not be so quick to give a blank check to the US government. Not only are their exports suffering (thus less money to lend), there is more US government debt than ever and China is wisening up to this potential calamity.

I dont’ think we will see amazing economic growth anytime soon, which the Obama administration seems to happily assume. Our politicians are attempting to transform America into a social welfare state, similar to European countries, where growth there is 1-2% in good years (not 3-4% as Obama expects, and this makes a big difference over time). The stimulus package mainly went to entitlements, not investments. Corporations face a higher corporate effective tax (as Obama has said he will close loopholes). Small businesses (people making $250k+) will face higher taxes soon. More regulations are coming. Environmental regulations will likely increase energy costs.

The outlook for growth is pretty abysmal, but the outlook for debt increasing is crystal clear. People like their entitlements, particularly social security and medicare. Politicians are slow to change the system that does anything but expand these entitlements. The sluggish growth will be a continued drain on tax revenues, so less revenue will come into the government, but more and more demands for entitlements and social welfare programs will continue. Our debt will balloon.

What’s the best way out of debt if you can’t default? How can you magically make the debt worth less? Inflation of course. With more US debt being issued, the yields will likely rise on the debt (hence my short position on treasuries). People won’t be willing to loan to the US at 4%, they may want 8% (or as high as 12%, like it was during the early 80′s). That will of course kill all lending to business and consumers, so the Fed will be pressured to buy more debt to lower yields. This will trigger inflation.

I like silver as the best hedge against inflation since I think it is more attractively priced compared to gold. The gold/silver ratio is still in the high 60′s, something that I think is a bit absurd since silver provides many of the investment advantages of gold. However, silver is ‘cheaper’ so I think the jewelry market for silver won’t get hit as badly as gold…people simply can’t afford gold jewelry compared to silver. Also, silver has many industrial uses much like copper. If you look at the early 80′s gold/silver boom, the ratio fell closer to 30 at the peak.

The deficits we are running and our debtload as a percentage of GDP are unheard of in peacetime. The last time our government was borrowing at such a massive rate was WWII, and prices nearly doubled between 1941-1950. Since our whole society is in debt, the easiest way out of this dilemma is a period of moderate inflation, which will allow for the debts to be wiped away and hopefully positive restructuring to be done for the future. The process will be painful. Cash holdings will drop in value and holders of fixed-income debt (particularly treasuries) will get slaughtered. Holders of commodities, especially precious metals, should make out like bandits though .

Note: Author is long SLV, SSRI, GLD, USO. Short TLT.

For example, let’s say you have a very large asset base, let’s call it $10 million. You believe the market is incredibly oversold, as it was a couple weeks ago. You want to borrow money to invest in the market. You decide to borrow $2 million, paying 5% interest. You believe that you can make 15-25% on the money you borrow, well above the interest rate you are paying. In this case, borrowing the money on margin looks like it will make a good payoff.

As you can see, the three key factors here are the margin rate you are paying, the amount you can make off of the money you borrow, and your risk tolerance. The above example, however, is a very optimistic one. Most of the time, for people with average or small asset base, margin rates are very high, generally 8.5% or more and can easily be 10% or more. Furthermore, the market returns about 10% a year on average, so most of the time, borrowing on margin mean taking on a lot of risk for potentially very little reward.

What exactly are the margin risks? Well, besides the fact that you are betting more money, so you can lose more money, you also risk a margin call. Let’s say you have $50k and borrow $50k on margin. The market gets pummeled, and your $100k in total investments ($50k yourself plus $50k you borrowed) drop down to $70k. At this point, there’s a very good chance you’ll receive a margin call. The broker will demand that you sell securities (or put up additional funds) so that you reach a certain level. For example, the federal government requires brokers to have at least a 25% maintenence requirement, though most brokers have a higher number.

Let’s say your broker has a 30% maintenence requirement. Since you borrowed 50k on margin, you will need to maintain an overall balance of about $71k or more before receiving a margin call. If you get a margin call, you will need to put up more money from your bank account or start selling securities.

Let’s say, in the $50k +$50k example that you’re somehow forced to sell all of your secuirites after your balance dropped to $50k. Now, all you have is $20k minus what you paid in margin interest. Even though the market only dropped down by about 30%, you ended up losing over 60% of your funds since you leveraged yourself.

As you can see, margin trading involves a lot of risk. It should only be done by expert investors who know what they are doing and can get access to a decent margin rate. For average investors, margin trading is generally a bad idea.

Thus, to financially plan you asset allocation, you should start searching for the appropriate asset that reflects your abilities and the risks you expect.

Asset Classes Include:

- Bonds

- Cash

- Stocks

- Foreign currency

- Real estate

- Natural resources

- Luxury collectables (wine, cars, art, … etc)

- Precious metals

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There are usually some important red flags that you, as an investor, should look for. Major among these is the “Material Adverse Effect” (MAE). This flag indicates that something is extremely wrong, such as a decline in profitability or even the bankruptcy of the firm/business.

Thus, although the SEC (Securities and Exchange Commission) and the legal boilerplates prefer to disclose as many problems as they can, red flags, especially the MAE, will provide investors with crucial information, helping him/her to avoid mistakes of investment.

Fixed income funds are mutual funds that seek to preserve a set income stream by investing in very secure investments like highly rated corporate bonds and government bonds. They can provide monthly income, diversify a portfolio, or a higher level of liquidity for the investor. These are generally lower risk investments with a lower return, but a return that can be counted on to remain, thus the term “fixed income fund.” Many of these funds also have expense ratios below 1%.

Asset manager funds seek to match investment with the lifestyle or risk-tolerance of the investor. For example, the more risk-tolerant the investor, the longer the investor has until retirement so that fund would be composed more of equity (stocks) and less of bonds that have a slower rate of return. As the investor becomes less risk-tolerant, that fund will become more composed of bonds and less of equity. These types of funds are usually more actively managed than, say, the index funds and can have higher expense ratios. This is true with Fidelity’s Asset Manager 85% (85% equity) at 0.87% in 2006 and Asset Manager 20% (20% equity) at 0.58% in 2006, respectively. Still, these ratios are lower than other types of mutual funds.

After its introduction to the OSE (Osaka Securities Exchange), CME (Chicago Mercantile Exchange, and the SGX (Singapore Exchange, the Nikkei 225 has become an international ingredient in the stock exchange. One of its other major indexes is the “Topix”.

The highest average ever recorded of the Nikkei 225 in the 20^th century was in 1989 (reaching 38,957.44 before closing at 38,915.87). In the 21^st century, it reached right above 18.300 points.

To weight stock by the Nikkei 225, they are given equal weighting based on 50 yen per share. Such weighting is also influenced by removals, splits and addition of constituents. Since it reflects the overall market, there is no final weighting for the Nikkei 225.Review results of the Nikkei 225 are published every September with changes applied early October. Such changes are usually announced in the Japanese Nikkei newspaper plus appearing on the NNI. Whenever a stock is being replaced, the divisor is, afterwards, changed to make sure that there is a smooth transition of the stock index.

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Futures are often traded in open-outcry and auction-style trading pits, at designated stock exchanges. Electronic trading systems like, Chicago Mercantile Exchange’s (Globex System are also used, in certain exchanges. Chicago Mercantile Exchange was the first to introduce futures trading. The exchange clearinghouse guarantees the performance and counterparty risk elimination, by substituting itself as the buyer to the seller and as seller to the buyer. The futures trade customers are required to post margin deposits, not against the market value of the commodity in the futures contract but as a performance bond or “good-faith deposit”, with an exchange member firm which, in turn, must deposit margin with the exchange, which ensures the market participants’ ability to honor their financial commitments and cover any obligations which might arise out of their trading activities.

A “long” position is the one in which we buy, i.e. receive a futures contract, and selling, i.e., delivering a futures contract is referred to as taking a “short” position. A long futures position profits when the futures price goes up, and a short futures position profits when the futures price goes down. Maturing futures contracts expire on specific dates, usually during the contract month. The futures trader may also offset or exit his obligation at any time before the contract matures, by selling what was previously bought, or buying what was previously sold. This way, a trader is relieved of any obligation to make or take delivery of the underlying commodity or financial instrument.

Futures contracts have standardized terms and trade on centralized exchanges. Its participants in futures trading can be divided into two broad categories: Hedgers, who actually deal in the underlying commodity or financial instrument and seek to protect themselves against adverse price fluctuations, and Speculators, who seek to profit from price swings.

The vast majority of futures contracts, in fact, are closed out by offsetting market transactions prior to their maturity, rather than through the delivery process.

Futures trading also carry significant risk, since; the futures contracts generally entail high levels of leverage. Due to this they have been at the heart of many market blowups. The most famous of all may well be Long Term Capital Management (LTCM); despite of having the best financial brains on their payroll, LTCM managed to lose so much money so rapidly that the Federal Reserve Bank of the United States was forced to intervene and arrange a bailout to prevent a meltdown of the entire financial system. Enron, Nick Leeson and Barings Bank have also faced the brunt of “futures” mismanagement.

In the United States, futures transactions are regulated by the Commodity Futures Trading Commission.

Companies that are considered part and parcel of the high-growth stage, are the companies that issue commons stocks and at the same time, do not pay dividends. As an investor, you might have a growing stock (in terms of prices) even though you are getting no dividend income.

On the other hand, some companies might pay dividends of common stock to its shareholders. Such companies are usually old, established entities that have already gone through phases of major growth, hence, their capability to produce a steady flow of dividend income to the shareholders. Such issued stock, whether it is common or preferred, is known as the “blue chip stock”.

Thus, when you decide to invest in stocks, you must identify your investment objective at first, whether it is growth or income. This will help you to choose the right company in which you can invest your dollars.

Day-trading probably experienced its height of popularity during the tech-boom of the late 1990s when stock prices for tech stocks soared, often without any financial foundation. These unfounded high stock prices and bloated market capitalizations were realized after the enormous tech-bubble burst in 2000 and 2001.

For this reason, day-trading is a very risky practice that should be left to professionals. However, there is no licensing required so the practice still enjoys tremendous popularity. Day trading requires special research about the trends of the market during the immediate time period. These traders will search for news releases, hoping to find trends that will come to play that trading day. Often, day traders will join together in groups, sharing tips with each other. To have a chance of becoming a successful day trader, the investor must have the necessary time available to do proper research. Day trading is a full time job.

Another asset commonly focused on by day traders is the marginable stock. Marginable stock is simple stock approved for buying on margin. Buying on margin is purchasing on borrowed money from an established margin account at a brokerage. The SEC established new rules in marginable stock in 2001 by requiring that $25,000 must be maintained in an account solely for the purpose of margins trading. The SEC, in fact, advises strongly against day trading. A notice on their site reads, “Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status.” Obviously, this is a risky investment but day traders seem to thrive on the ultimate investment thrills.