Possibilities and Pitfalls: The Internet as an Investment Tool
This brochure from the NASD informs investors about the
benefits and pitfalls of using the Internet and online services as
investment tools.
A Powerful Resource . . .
As increasing numbers of individuals take the on-ramp to the fast-moving
information superhighway, the Internet promises to revolutionize how our
society works. Currently, more than 40 million people harness the power
of the Internet - a number that has roughly doubled every year since 1988,
with projections estimating 500 million users within the next few years.
For the securities industry, the Internet has helped democratize the
investment process by providing widespread access to even the most specialized
information - thus leveling the playing field for thousands of individual
investors. And, while websites display updated quotes (now with as little
as a 15-minute delay), chat rooms provide forums for stocks not widely
followed on Wall Street.
But Users Beware!
Like any technology still in its infancy, the Internet has its own set
of growing pains. Because its ultimate potential is still unknown, many
of its dangers are only beginning to surface. An informal study of half
a dozen stocks conducted by NASD Regulation, Inc. (NASDR) showed a close
correlation between Internet postings and changes in both trading volume
and price.
This creates a dilemma for the regulatory agencies that protect investors:
While NASDR will pursue securities fraud or stock manipulation perpetrated
on the Internet aggressively, it would be an impossible logistical task
to monitor every investment-related posting at thousands of chat rooms,
bulletin boards, newsgroups, and homepages. In addition, organizations
such as NASDR and the New York Stock Exchange have authority over their
members only. Unless an infraction stems from a registered broker/dealer,
our regulatory powers face severe limitations.
While federal and state regulators possess additional investigative
capabilities and subpoena power, resource limitations can impede their
regulatory efforts. As the Internet continues to evolve, many rules -
as well as the underlying tension between government regulations and freedom
of speech rights - have yet to be defined. In fact, under the umbrella
of First Amendment rights, many communications that could harm investors
are not necessarily illegal. And, even if a rules violation did occur,
it could be difficult to recover lost money through regulatory action.
Only as Safe as You are Smart
While most individuals 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.
Remember, always consider the source of any information you receive.
Although most on-line services, bulletin boards, and chat rooms display
the screen names of users, individuals can remain anonymous behind aliases
and misinformation. In most instances, there is simply no way to uncover
someone's true identity. Are you getting information from a broker, short
seller, corporate insider, amateur investor, or stock touter? And why
do they have a stake in what you do with your money, anyway?
Protect Your Investments
Never make an investment decision based solely upon what you read on-line.
Even if motives are honest, there are no guarantees that the information
is accurate or the advice is sound. The real-time nature of the Internet,
combined with its growing base of users, makes it a prime target for stock
touting and bashing. Be wary of the gossip and unsubstantiated rumors
that often infest these on-line sites.
A high pressure pitch for a particular investment can mean trouble. Be
suspicious of "once-in-a-lifetime" opportunities, or demands
to "invest quickly." Be alert for recommendations based on "confidential
information," an "upcoming favorable research report,"
a "prospective merger or acquisition," or the announcement of
a "dynamic new product." And, be especially careful with advice
about unfamiliar securities.
There is no substitute for your own detailed research via a variety of
media and sources. Any information you find on the Internet should be
double-checked and verified. Consult business and financial publications,
as well as a company's prospectus, offering circular, or most recent annual
report. For smaller companies raising less than one million dollars -
often the most difficult businesses to locate information about - be aware
that the SEC requires these companies to file a "Form D" that
includes the names and addresses of owners and promoters. Furthermore,
it is always a good idea to check with a brokerage firm, an accountant,
or a trusted business adviser to get a second or third opinion about an
investment. For general guidelines on making investments, refer to "Invest
Wisely" available from the NASD.
Be
your own watchdog.
The Internet is vast and resources are limited. Regulators just can't
keep an eye on every corner and crevice.
Question all advice.
If you don't know the source of information or the motives behind the
source - as is often the case on the Internet - challenge the validity
of the information.
Measure twice and cut once.
Never make investment decisions solely based upon what you read on the
Internet. Always consult other resources.
Do your homework
Although the Internet opens up access to a variety of new information
sources, there is no substitute for your own detailed research.
Use good judgment.
After
all, every investment has its risks. As the saying goes, "If something
seems too good to be true, then chances are it probably is." It
might be a cliche, but it's right on the mark.
Call on the experts.
If you suspect something is shady, trust your instincts. Notify the
regulators before you act.
NASD Regulation, Inc.
NASD Regulation, Inc. (NASDR) was established
in 1996 as a separate, independent subsidiary of the National Association
of Securities Dealers, Inc. The mission of NASDR is to regulate securities
markets for the ultimate benefit and protection of the investor.
It oversees the activities of more than 5,400 securities firms, more than
58,000 branch offices, and 513,000 registered securities professionals.
In addition, it regulates the markets operated by its sister subsidiary,
The Nasdaq Stock Market, Inc.
"We are committed to providing investors with the best possible protection,
but there is only so much we can do. Although the link between investing
and the Internet is full of endless possibilities, it is still vast, uncharted
territory. Ultimately, it comes down to each investor taking the appropriate
steps to steer clear of the pitfalls." - Mary L. Schapiro, President,
NASD Regulation, Inc.
Reliable Sources
Several reliable sources exist on the Internet
for information on investing:
The NASD Regulation Homepage at www.nasdr.com
The SEC Homepage at www.sec.gov
The Commodity Futures Trading Commission Homepage at www.cftc.gov
If you think you have been the victim of wrongdoing, or that securities
laws may have been violated, you should contact the appropriate regulators.
NASD Regulation, Inc.
1735 K Street NW
Washington, DC 20006-1500
(301) 590-6500
U.S. Securities and Exchange Commission
Office of Investor Education and Assistance
450 5th Street NW
Washington, DC 20549
(202) 942-7040 TTD (202) 942-7065
For regional information, contact the NASDR office nearest you:
San
Francisco: (415) 882-1200
Los Angeles: (213) 627-2122
Denver: (303) 298-7234
Seattle: (206) 624-0790
Kansas City: (816) 421-5700
New Orleans: (504) 522-6527
Dallas: (214) 969-7050
Atlanta: (404) 239-6100
Chicago: (312) 899-4400
Cleveland: (216) 694-4545
Washington, DC: (202) 973-7000
New York: (212) 858-4000
Boston: (617) 261-0800
For the telephone number of your state securities regulator:
North American Securities Administrators Association, Inc.
One Massachusetts Avenue NW Suite 310
Washington, DC 20001
(202) 737-0900
For a free check of your broker's disciplinary history, please call:
NASD Regulation Central Registration
Depository 1-800-289-9999
