ABA Family Legal Guide

Computer Law

Online Purchases

Stocks and Securities

How do I protect myself from falling into a trading trap in which the website operators promise big returns?

Trading stocks online or off line can be akin to gambling. Be careful of any site promising a sure thing. The Federal Trade Commission recommends that investors on the Internet check out the stock promoter with state and federal securities regulators and talk to people who have invested through the website.

The U.S. Securities and Exchange Commission (SEC), which oversees publicly traded companies, also warns computer users of the dangers of investing online. In particular, the SEC says online investors should beware of "pump-and-dump" stock scams in which unsavory individuals tout a company on a website, in an online investment newsletter, or via e-mail with the sole purpose of creating high demand for the stock and pumping up its price. The perpetrators of the scam then sell their stock when the price is at its peak, resulting in a quick and sharp fall in the stock price. The unwitting investors then usually lose their money.

"Some online newsletters falsely claim to independently research the stocks they profile," the SEC states on its website. "Others spread false information or promote worthless stocks. The most notorious sometimes 'scalp' the stocks they hype, driving up the price of the stock with their baseless recommendations and then selling their own holdings at high prices and high profits."