Reference no: EM132627826

Elaine Jackson gets a visit from her cousin Phil. He wants to apologize. Last year he regaled her with stories about a small company he had discovered that had just invented a high-tech converter to allow cars to run on water. It was still all hush-hush. The stock was trading for just one penny per share. Phil told Elaine he had put all his savings into it, and he wanted to share the tip with her. She purchased stock using $8,000 that she had been saving for two years. Later, when her money was long gone, she realized she had been the victim of a classic "pump and dump" scheme whereby unscrupulous promoters bought up "penny stocks," started a rumor about big profits, and when enough suckers bought in and the stock price shot up, the promoters bailed out and made a profit. Phil has just gotten out of prison, and he feels terrible about what he did. Elaine has learned an expensive lesson.

Requirements

Problem 1. Why were Phil's actions considered to be fraudulent?

Problem 2. Does the current market price of a share of stock give any indication of the value or success of a company?

Problem 3. What sort of information should an investor look for before deciding to invest in the stock of a company?