How to invest wisely in Second Life Stocks

By Annabis Moody, Financial Editor
SLReports.net

Since the collapse of Ginko bank, many investors in the Second Life financial world are considering stocks as an alternative to let their money work for them - but some might feel safer understanding more about the SL stock environment.

A few of the areas to look at when considering plunging into the market are examined here including issues of fraud protection, insider trading and how to know which stocks fall within a particular investor's risk tolerance range.

There are actually four separate entities which operate in the market, VSTEX.net, International Stock Exchange (ISE), SL Capital Exchange (CapEx), and World Stock Exchange (WSE). They all operate on the same general principle, but each has their own have distinct policies and corporate culture. People disagree as to the effectiveness of this; some said it would be more stable if all markets would consolidate, while others said that competition among markets has a tendency to keep the exchanges more honest.

Independent market analyst Warren Flanagan said the splintered markets are a bit disconcerting and they should consolidate, but felt they never will because there is simply too much history involved.

"If all the markets were consolidated things would get a lot better, because there are only so many active investors," said Flanagan.

Others in the financial arena disagreed about consolidating the markets into one authoritative stock exchange.

"I think it's stronger without them consolidating," said Maelstrom Baphomet, CEO of Dragon Global Diversified (CapEx: DGD). "It forces market managers to be honest or face loss of business. In fact, the more honest markets there are the better because competition is good for the soul."

Although any investment involves some element of risk, the question of financial security surfaces. How can people determine which stocks fall within their particular risk tolerance level?

"Personally, I believe the only way to manage fraud and default risks is to self-insure against them," said Flanagan. "Because we have no legal system in SL-- no all-powerful government regulator."

Good indicators on the potential safety of stocks are illustrated by companies which encourage complete transparency, actively self-regulate and provide secure financial back-ups to protect potential investors against fraud. One example of a fund that has proactively instituted these ideals is Baphomet's DGD corp.

"I applaud Maelstrom Baphomet's decision to create a fraud protection reserve in his DGD fund," said Flanagan.

In addition to providing detailed monthly reports on finances, Baphomet has a concrete financial fund in place to limit the financial risk for investors. Baphomet said DGD Protected Allen represents the protected value of stocks, and currently the fund guarantees all outstanding public shares.

"My fraud protection fund is pretty simple. I have a cash guarantee backing the shares of my stock, in the event I have to shut down for any reason, this value will be issued to shareholders as a dividend," said Baphomet. "Currently the fund stands at about half of the IPO value and has been incremented as time goes on."

Baphomet said DGD Protected Allen represents the protected value of stocks, and currently the fund guarantees all outstanding public shares.

"This ensures that every single share will have a cash value backing, making every share AAA secure by SL standards because all the money is kept in an alternate account for the company," he said.

According to Baphomet, the only possible risks to the fund would be a total SL collapse, SL errors such as when funds are not transferred properly between accounts during bad lag periods or the possible inability to convert linden dollar value to cash.

"His (Baphomet's) choice to create a fraud protection fund, also inspired Investor Allen to create the same type of plan on the AVIX," said Flanagan.

Other methods to evaluate the potential safety of any stock would be to ensure there is adequate financial transparency, especially in the area of financial accounting practices.

"Competent accounting is a real need, but I can't find a way to make it happen, said Flanagan."I would like CEOs to have someone onboard who could put together a simple balance sheet, but the fact is there's too little supply in that market."

Flanagan said it is very difficult to determine whether a business is viable when they either have no financial track record or believe that recording and presenting their finances is too great of an expense. He said not all stockholders demand this type of financial reporting, and many base their investment decisions on the perceived integrity of a company's CEO.

"Investments in SL are largely a gamble based on faith in the CEO or their directors," said Flanagan. "The Ginko collapse shows that bank deposits in SL are a gamble, or at least suggests that maybe things are not quite so safe."

Flanagan said any investment venture always incurs some risk, but at least stocks are generally liquid.

"The exchanges are probably a lot safer than the independent banks, they at least have easily verifiable business activities," he said.

Insider trading is also a constant concern for the average stock investor, in SL as well as real life.

"Insider information is very easy to come by," said Flanagan. "I don't think there's one successful investor here who hasn't benefited from asymmetric information, either inside knowledge or simply learning about an event before others."

To protect against insider trading, a recent decision implemented by Cocky Dagger, CEO of the ISE developed a policy to help prevent insider trading by reporting trades by CEOs and their alts, which are tied together by a single IP address.

"His real objective with the ISE was to discourage fraud from the start, the rule he implemented lately was an excellent decision," said Flanagan.

The smart investor should perform due diligence before investing and look for transparency in accounting methods and reporting, secured fraud protection plans, and look at past performance (although every stockbroker will emphatically tell you that past performance is no guarantee of future performance) and lastly they should try to find out about the company CEO and partners directly.

Flanagan believes that most reporting on stocks is biased, but feels it's easy enough for people to get their own information through direct contact with the CEOs and their business partners

"They (CEOs) are primarily easy to contact and if you're a little bit intuitive, it's fairly easy to see through the propaganda," said Flanagan. "Basically you will see a lot of them provide purely optimistic estimates of their own future performance, but by meeting with them personally, you can try to gauge the level of BS in any particular sentence and thereby divine the truth."