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 â€œpump and dumpâ€ scheme whereby unscrupulous promoters bought up â€œpenny stocks,â€ started 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.
1. Why were Philâ€™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?