Is it safe to trade based on information I get from a broker's internet chat room?

When people trade online, they sometimes go to broker's chat rooms and ask for advice. These broker internet chat rooms are set up to help individuals with their trade and transaction decisions, and while most of the people who use these sites have honest intentions and use the Internet as a legitimate investment tool, others may seek to distribute information and advice in order to manipulate prices or take advantage of unsuspecting investors.

So, how can you know when it is safe to trade based on information from a broker's internet chat room, and when it is a ploy to manipulate prices?

Well, it is hard to know, but first and foremost just knowing that people do this can help you protect yourself from it happening to you. Many people have found that the Web provides an easier, cheaper, and more far-reaching medium for perpetrating fraud than any other medium, thus they exploit that. While it is difficult to weed the good from the bad in this kind of environment, being aware that there is bad is a good place to start.

The next important thing is knowing what kind of fraud is normal for internet broker chat rooms. One of the biggest found is that of "pump and dump" schemes, which are indirect fraud. The scammer uses the chat rooms or websites to really get hype about a particular stock. People, buy or trade, and the pump up the price, then the scammer dumps their large portions of stock, which makes them a fortune, but causes the stock price to plummet, and everyone else gets screwed.

Recognize the warning signs and red flags associated with broker chat room advice fraud. For example, if it sounds too good to be true, it probably is, "risk-free" investments do not exist, so don't believe it. Often times you get scammed in such a way that you have no grounds to be angry with anyone but yourself. Most effective fraud schemes are indirect. Be a smart consumer and protect yourself from being scammed through an indirect fraud.

Indirect frauds supply false or at the very least, misleading information in chat rooms, mass e-mails etc. in the attempt to get you to buy a certain stock, or trade etc. And, unfortunately these stocks that are being hyped up are super insignificant, and sell for next to nothing, thus it can be very hard to do any research to find out if the claims are legitimate. So, if you can't prove the advice is legitimate, you are better off not taking it. There may be a chance it is valid, and you may pass up an opportunity, but probably 9 times out of 10, hype about a stock that is spread through chat rooms is an indirect fraud.

When you want to make a safe trade, you have to consider the source of the information you receive. If your broker tells you something, it is valid because they are paid to do so, and they deal with you directly; where as if you hear it only through bulletin boards, and chat rooms you run a greater risk of it being untrue. Chat rooms have the problem of using screen names and a monitor, which means that individuals can remain anonymous behind aliases and misinformation, and you can never really do anything about them giving you misinformation. It is easier to lie when you do not have to do it face to face. The problem with chat rooms is that you can't really tell whether you are getting information from a broker, short seller, corporate insider, amateur investor, stock touter, criminal, or merely a prankster. So, don't stake your money on information obtained on a broker's chat room unless you have other things to back the information.

Wise investors never make an investment decision based solely upon information from one source, and you shouldn't either, no matter how valid you feel the source may be.
Reliable Sources

Several reliable sources exist on the Internet for general information on investing and trading, these include the following, and you are better off using these than using broker's chat rooms:
NASD
The U.S. Securities and Exchange Commission
The Commodity Futures Trading Commission