How to Spot Fake Financial News

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The internet gives us unparalleled access to information from all across the world, but it also makes fake news much easier to disseminate. And fake financial news is particularly dangerous; if such an article fools you into making investment decisions based on what you read, you could potentially lose a huge sum.

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The new face of the pump-and-dump

Pump-and-dump schemes are nothing new: buy a stock at a low price, spread stories and rumors that will cause investors to buy in and the price to rise, and then dump the stock before it collapses. Some companies have found a new angle for the pump-and-dump by hiring writers to post fake news articles online that include glowing reviews of the company's stock, without disclosing that the writer was hired or paid by the company. A recent SEC crackdown identified over 450 "problem" articles across a number of financial websites, 250 of which falsely claimed that the authors had not been paid for writing the articles.

PR gone wrong

In late 2013, Galena Pharmaceuticals' PR firm allegedly paid a writer to post bogus promotional articles on investor website Seeking Alpha. Galena's share price jumped from around $2 to over $7 in November 2013 as a result of these and other fake news pieces, at which point several Galena insiders promptly sold their shares (as of this writing, the stock is at $0.58). Seeking Alpha removed the bogus articles in early 2014 and published an article by investor Richard Pearson which described in detail how he'd allegedly been approached to write similar paid promotional articles about Galena. An investor who had been tricked by one of these articles into buying the stock would have lost big-time when the inevitable collapse came.

Consider the source

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One of the drawbacks of the internet is that it's cheap and easy for anyone to put up a blog post or article, regardless of whether or not he or she knows anything about the subject. Facebook and other social media sites are particularly rich in fake news, including fake financial news. Before making any financial decisions based on something you read on the internet, research the author and confirm that he actually has some expertise on the subject. Be especially cautious about articles you find on less than reputable websites and on any social media page.

Watch for spoofs

Some authors and websites specialize in writing parody or satire articles that are not meant to be taken seriously. Unfortunately, some readers do take these articles seriously, thinking that they are meant to be real news articles. Before you act on such an article, browse through the rest of the website to see if it consists mostly of ridiculous claims or other hard to believe "exposés." If so, you can safely ignore the article (and hopefully get a good laugh out of it). When in doubt, check Snopes or another debunking site to see if they have a report on the article in question.

Check the date

Like chain letters, outrageous news stories often bounce around the internet indefinitely, going through periodic revivals as they repeatedly go viral. When you see several different sites reporting the same implausible news, check the links within the stories to try to trace back to the original report -- then check the date on that report. If it's several years old, you can safely ignore the story.

Get verification

When you see some potentially huge investment-related breaking news, the impulse is often to act at once. Instead, Google the subject and see what other people are saying about the article you've just read. If it's real news and not just a scam, reputable websites will have the story up as well. Given the speed with which information travels across the internet, "breaking news" doesn't stay that way for long -- so if real news websites are not discussing the story, you can safely ignore it. In fact, the best thing you can do in response to any startling financial news is to take the time to think it over and do some research. You may lose a little time as a result, but you're much less likely to lose your shirt.

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Wendy Connick has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.