The Thin Stock

Buy Zeigletics!

CUSTOMARILY, the companies promoted by the compleat Hypester are bantam operations with insufficient prospects to qualify them for any of the major U.S. exchanges. The potential reasons include grim financial statements, a stock that is too thinly traded, a share price that is too low, and a management that owns too large a chunk of the company.

These disqualifiers are used by the major exchanges in part to complicate any efforts to manipulate the share price. For example, a company with 1,000,000 total shares that trade at $0.10 each will have a hard time getting listed on an American exchange. The entire value of its stock is a mere $100,000.

Imagine the push that can be exerted on the share price by a hypester who manages to induce 500 online acquaintances to buy $1000 of the stock each. This $500,000, equivalent to five times the market's value of the entire company, will quickly and dramatically push up the share price, whatever the actual merits of the stock or the company.

It is just such situations that prove so lucrative to those currently using the power of a new medium: online computer communication. For the first time ever, services like Prodigy, America Online, and the Internet enable a single person to get the attention of thousands of others merely by posting a message on a public forum (anonymously, if desired) with the click of a button.

The operation is simple. First, the Hypester purchases thousands of shares for himself at a bargain price (usually a few dimes). Next he signs on to one or more online services and writes rhapsodically (though, in practice, illiterately) of the company's outstanding prospects. Some are convinced and buy, pushing the price up. His shouts of "BUY!" get louder, and he is now able to point out what a winner this stock is. More people buy, the trading volume goes through the roof, and the price follows in tow. A typical $5000 investment in a stock that moves from 25 cents to $1.50 in a month would net the investor a tidy profit of $25,000. . . compounded monthly.

At some unknown point, the Hypester will turn just such a profit by selling his shares to the very people he has duped into buying. That he can actually foist off his shares on someone else at such a dear price is a testament to the power of the imagination. For it is the sensationalized, often exotic story that so dependably attracts these novice investors.

David Gardner and Tom Gardner, The Motley Fool, Copyright © 1994