Bulletin boards are pure poison for private investors

I was doing the updates for my Red Hot Penny Shares portfolio recently when I noticed something a bit strange.

One of the stocks (click here to find out which one) had jumped up 30%.

In most cases, a one-day jump of 30% would be quite pleasing, but this time, I sensed something was wrong.

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You see, there was nothing that should've sent it up that high in such a short space of time. No results statements. No announcements. No deals. Nothing that would qualify as a flashpoint.

But on internet bulletin boards, people were posting that this particular company was on the verge of signing several high-profile clients.

It was the first I'd heard of it.

Almost immediately, the company in question issued a statement, declaring that these "deals" were nothing more than rumours. As well as denying the rumours, the company passed details of the incident to the Financial Conduct Authority (FCA) whose job is to regulate the market. Spreading false information like this falls under the FCA's definition of market abuse' and can lead to the miscreants being fined.

Next day, unsurprisingly, the shares moved back to the level they were trading at before the excitement started.

But by then, it was too late for some investors.

Don't let bulletin boards cloud your judgement

Meanwhile, I reckon whoever was behind the stories made a quick 20% profit, after allowing for the dealing spread.

So I suppose I was right to be suspicious.

But I can see why my RHPS stock would have made an appealing target.

Just before Christmas, it had exploded upwards by 250% in a single day after announcing a deal!

Small caps like this can move dramatically on news of a significant contract. Which is why we like them. They make exciting investments.

But it also makes them tempting targets for stock manipulators.

The stockmarket rumour mill has grown enormously in recent years

Stockmarkets have always thrived on gossip and rumour. The London Stock Exchange had its origins over 300 years ago in Jonathan's Coffee House the sort of venue where it's easy to imagine chatter and speculation being rife.

When I started in the City over 30 years ago, shares were traded face-to-face on the floor of the exchange. As a fund manager, I spoke to my brokers over the phone and shared the gossip over lunch or a beer. It was a clubbable' atmosphere. Ramps and bear raids were all part of the colour and excitement.

However, the world has moved on. Shares are now traded electronically. Instructions are given to brokers via instant messaging on Bloomberg terminals. Lunches are much more austere events. Yet there's still the natural human instinct to gossip and speculate about what the future holds for stocks.

Just as the internet has made share trading cheap and easy, it's opened up a treasure trove of valuable information to private investors as well. But it's also brought us noise: social media and, worst of all, bulletin boards.

There may be some useful information but it's drowned out by nonsense

But the problem is that they also provide a platform for people who are tempted to spread mischief and distort the market.

Personally, I rarely bother with bulletin boards. Most of the stuff posted on them is nonsense or of little value. It can get in the way of making a good judgement on a stock.

Bizarrely, a lot of the posts seem to focus on reporting share trades and predicting where the share price is going in the next few minutes. Which strikes me as a particularly pointless way of passing the time!

Like anything on the internet, you have to employ your critical faculties to sniff out whether the points being made are valid. If you can identify which posters are sensible and well-informed, these forums can be useful.

But the story of my tip is a good example of the dangers. Some people think it's OK to say what they want on social media. But if it amounts to market manipulation, they can end up in deep trouble. And the victims who dealt on the false information can end up losing money.

So if you like to look at the boards, be sceptical. After all, you probably wouldn't deal just on the back of a tip some bloke in the pub gave you. And at least you could see what he looked like! Look at all the posts made by an individual, use them to form a view of whether they're on the level and worth listening to. But above all, trust your own judgement.

Or you risk ending up like those unfortunate investors last week.