Think Wall Street is rigged? Learn how to protect yourself
— -- Q: Why would anyone want to invest in stocks since it's a rigged game?
A: Naked short selling. Hyper computerized trading. Insider trading. Dark pools.
All these seedy elements of the stock market are enough to turn off some investors. And there's no question that given the amount of money to be made from stocks, there's going to be the temptation by some to bend the rules and abuse the system.
Investors have to appreciate the fact that yes, indeed, there is constant wrongdoing going on in the market. The Securities and Exchange Commission's Office of Public Affairs keeps a running summary of all the enforcement actions, insider trading, Ponzi schemes and other wrongdoing it's finding.
And it's not that the SEC one day will stomp out the last Ponzi scheme or insider-trading ploy. For every crook who's accused, there are dozens more who are hatching up new plans. Meanwhile, there are certainly cases when new electronic trading can distort market mechanics, especially in individual securities.
But don't let all this discourage you from investing in the stock market. The U.S. stock market, despite its problems, is still one of the most liquid pools of capital for companies in the world. The U.S. stock market hosts trading in some of the biggest global companies. Participating in the stock market gives you a chance to own the wealth-creating power of these corporations.
And if you just follow a few common-sense rules, you can help protect yourself from the inevitable games that are played. Investors should:
•Avoid stocks that don't trade on the major exchanges. Are there problems with stocks that trade on the New York Stock Exchange or Nasdaq? Absolutely. But those problems are nothing in comparison to what investors are subjected to when they dabble with many stocks on the Pink Sheets or OTC Bulletin Board. If a stock isn't listed on an exchange or doesn't have audited financial statements, avoid it.
•Invest for the long term. Short term, stocks can be seriously whipsawed by shenanigans that occur in the markets. Powerful traders with access to the right computer systems can move stocks in the short term. But eventually, stocks move to reflect the value of their revenue and earnings. If investors invest over the long haul, and don't get overly interested in short-term moves, all the noise in the market is just that: noise.
•Trust, but verify. If you give someone your money, you need to check them out first. Always make sure a broker or brokerage firm you give your money to is registered with the proper regulators. Always look up brokers and brokerage firms in Finra's BrokerCheck system.
•Use limit orders. Don't enter blind market orders to buy stocks at the current going price. These orders can expose you to some trading games that traders play. Always enter limit orders, which set parameters on how much you're willing to pay for a stock and a floor on what you're willing to accept when selling. Limit orders usually have the same commissions as market orders, and can give you a great deal of protection from the market's short-term distortions.
•Be boring. I can't tell you how many investors I hear from with heart-breaking stories after they shot for super-charged returns. Don't let your greed wipe you out. Sure, it's possible to hit a home run if you happen to buy the right stock at the right time. But most investors buy the wrong stocks at the wrong times. Having a prudent plan of owning all sorts of asset classes, ranging from U.S. stocks to international stocks and bonds, isn't going to gather crowds at a cocktail party. But over time, this slow-but-steady approach will keep you out of the poorhouse.
Investing in the stock market is a key part of how investors afford their long-term financial goals. Don't let the reports of problems scare you away. If you manage your risks and avoid making easy mistakes, you'll be able to profit from stocks.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz