News about Shares – Part 1

I am getting bombarded with news about shares from my broker. Every other day, I get messages right before the market starts suggesting/advising me to buy a certain stock at the market price so that it will increase in near future. I had previously written about it and my thoughts about the suggestions.

Let me get into it further. First and foremost why do they have to send a message? Doesn’t it cost the brokers money for sending me messages? I am sure it does. But why they do such a thing? Who asks them to send such messages? Do the brokers send such messages in good faith just because I am one of their privileged customers? I don’t think so. No lunch is free lunch is what corporate world has taught me and if it is true then what is this all about.

I have learnt that spamming actually makes money. There was a study done and it revealed that 90% of the mail that is sent across is SPAM. Why do people spam? What is this fuss about? Spamming is a costly process and it requires dedicated servers running continuously and shooting mails to random mail addresses. If it costs so much money do they really get back their money? They do and they make amazingly good amount of money. Don’t believe me? Read on.

Spamming the privileged customers is the easiest way to lure them and buy the product. Brokers are very good at it. This is actually a message sent by the broker house that I am associated with:

Buy XYZ Metals @ Mkt Price. Tgt 400 – 415. Bonus Likely Company & recently declared 40% dividend. HIGHER <> FREEZE <> FIRE. PLAY UR SHOT. (BROADCASTED – MKT 50 : 50)

This message would have been flooded to at least lakh customers or more in Bangalore alone. I am definitely sure that the broker house I am with will have that many customers. Assuming that they have say 5 lakh customers, this is how it works. The company XYZ metals which was earlier known to some people now after this message is known to 5 Lakh people. In that 5 Lakh say 1000 people get interested in this metal company and actually buy the shares of the company. Now XYZ metal company has got 1000 new share holders.

Why would the broker advice about XYZ Metal Company? Is XYZ Metal Company the only metal company that he has followed closely? The answer is simple. XYZ Metal Company would have paid the broker certain amount so that it gets noticed. Say it spends Rs. 5 Lakh for messaging all the customers. Does it get back? Assuming that 1000 people buy 1500 shares say at Rs. 380 then the total transaction is worth Rs. 5.7 Lakh. The company might not directly benefit from this transaction but indirectly it is. It has got valuable share holders who believe in the company and also the price of the shares have gone up since these people started showing the interest in buying them the rates would be naturally going up. As the price of the shares increase the value of the company also increases.

Continued in part 2.

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