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10 Reasons to be cautious about hot tips in the stock market

05 Jan 2023

In the era of SMS messaging and WhatsApp transmission it is quite normal for us to keep getting trading ideas on our mobile phones. As an old saying in Wall Street goes, "Tips are for waiters". Nobody made money by believing in tips and whispers in the market. If it was that simple then probably everybody would become a dollar millionaire in the equity market. But the point here is that you need to be actually cautious about tips. Here are 10 very solid reasons for you to be cautious about such tips..
10 Reasons to be cautious about market tips..

So your friend just sent you a message saying that a small pharma company based out of Hyderabad is going to be a 5-bagger in the next one year. The story also seems to be quite credible. You just need to ask yourself one question. If that was a sure-shot tip then why is the friend of yours so eager to give you the tip? Would he not be better off investing in the tip himself?

So your friend says that he does not have the capital to invest, so he is giving you the tip. Don’t believe that story. If you have a sure-shot 5-bagger on hand you can actually afford to borrow money in the market and invest in this stock. Even a personal loan just about costs you 17% rate of interest today. Does it not make sense to borrow at 17% and invest in a stock that is a sure-shot to give 400% returns?

Most likely someone is stuck in the stock and is looking for an exit. That is entirely likely. Normally, there are a lot of traders and proprietary desks who keep accumulating mid-cap and small cap stocks at lower prices. Some ideas click and some don’t. How do they get out of these ideas that do not click? The best way is to sell a story in the market and invite friends and family to create demand.

Very often promoters are looking to sell a chunk of their holdings. We have seen such instances happen quite often in the Indian context. Many fly-by-night promoters are always on the lookout for a quick exit at a profit. You may be providing the demand support and the supply may actually be coming from the promoters.

There could be a reverse news play on the stock. What exactly is this reverse news play? Here is how it works. A bunch of investors get together and talk the price of the stock higher. Once the stock has appreciated sharply, they look to distribute the stock among a large clutch of small investors. Once the distribution is completed, then the company starts releasing bad news on the company. As the stock cracks, the same clutch of investors is ready to buy the stock at lower levels. By making a neat margin, their cost of holding the stock almost becomes nil.

Another possibility is that a group of investors in tandem with brokers may be acting as a front. They could either be a front for the promoters or some competitors. The movement of such stocks will not be driven by fundamentals. Hence you may unwittingly get caught in the volatility and end up with huge losses. More often than not, tips on small cap stocks are of this nature.

The moment you read a tip you can make out that there is no fundamental basis for the same. The tips will typically talk about getting huge orders or some likely acquisition or merger. Such news can never be verified and hence such stocks are best avoided. Interestingly, most of the stock tips that you get will pertain to small cap stocks that are not tracked by analysts since such news cannot be verified. That is why you need to be doubly careful.

You never know what the company is doing and you may end up buying shares in a company that is actually indulging in an illegitimate business or even laundering money. You may have purchased the stock innocently with a view to making some quick money but when the regulator and the exchanges start investigating you may end up answering a lot of questions. That is a situation that is best avoided.

A very important technique is to give you a stock tip and encourage you to share with your friends via WhatsApp and SMS. You may end up doing the same without understanding the implications. Remember, you are not supposed to share unverified tips as per SEBI regulations and the audit trail of your WhatsApp is constantly tracked. It is best to avoid the embarrassing situation.

Lastly, avoid any call which specifies the quantity to buy. Buy 10,000 shares of XYZ Ltd; is clear overkill. The person giving the tip has obviously given target assurance for demand creation to another party and is trying to use you as bait for providing demand. You will be left holding worthless paper in your hands.

Be wary of hot tips. Rule 1 is that nobody in this world is really keen to make you a millionaire; so perish that thought. Stick to quality stocks or stick to mutual funds. These hot tips are best ignored!

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