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Wednesday, June 24, 2009

How market trap work?

There are a lot of investment traps in the market. What is that? Is where rumors showing a company's share price is overly undervalued & performance is over weighted and follow by a sudden upsurge of share price which cause retail investors to rush in buying something valueless at high price. Buying this kind of share is a ticking boom awaiting to burst, an equilibrium game where there are winners & there are losers, the money flow from loser to winner and the winner is always the big guy.

How it work?
- at first the big guy(fund, hedge fun, large cap investors) searching companies background for undervalued companies
- those companies usually have the characteristic of healthy balance sheet, continuous earning record, good indicator of undervalued (low PE ratio, low Price-to-book value ratio) but low dividend yield, low growing prospect
-at the first place, they accumulate the share
-the encourage their friends working at stockbroking firm & publication company to let the public know the share is undervalued
-through various media, retail investors are exposed to the information of the company and accept that the company is good
-but at this time, no investors will move in due to low interest, low sentiment on the share price
- they will ask if the share is good, why the price is stagnant? if i invest now, i'll have to wait for a very long time
- the big guys place a sudden large amount of buying order to push the share price to surge for at least 30% at a rational pace
- retail investor's mind change, they are misguided to look the company as a fantastic company and keep getting in the share
- the big guys use various way to spread the rumors telling the public how much the share price will reach
- investor believe the share price is still way too cheap to get in as they believe the price will reach the price that the rumor tell, that is when the big guys exiting
- once big guys exited, no one are able to support the share price, the share price will eventually at free fall condition

That's it. So, be smart. Be an intelligent investor.
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