1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

You will Get Burned Following Hot Stock Tip

Avoid Investing on Information from Unknown Sources


Have you ever bought or sold a security on the basis of a “hot tip” or rumor?

Most investors have discovered that there are plenty of people and sources with information they will be glad to share, whether you asked for it or not.

Much of this “information” falls into one of several large categories:

  • Well-meaning friends and associates;
  • A broker or financial adviser;
  • An information service that sells investment advice
All of these sources of investment advice are legal, although the quality of information varies greatly.

Another Source of Stock Information

There is another source, or more specifically, a type of “information” that can play a major role in market activity.

This information is usually urging you to buy or sell a particular stock or other security.

The problem with this advice is that it often is designed to manipulate the security’s price in some way that benefits the person or organization behind it.

This activity is, at best unethical and may be illegal.

The Securities and Exchange Commission (SEC) works hard, along with other agencies to prevent market manipulation by any means, including spreading false rumors or other “disinformation.”

Protect Yourself

You can protect yourself by questioning the source of information and being suspect of opportunities that are too good to be true.

Unsolicited e-mails, letters or phone calls from people you don’t know should be viewed with suspicion.

Remember, even a familiar name or one that sounds familiar is not enough to act on their advice.

Internet scams include creating phony Web sites that mimic the real thing.

Important Questions

Here are some questions to ask yourself when presented with information that involves a security:
  • Why have I been presented this opportunity from someone I don’t know? (If you get an e-mail from someone you know that proposes an investment opportunity, it never hurts to follow up with a phone call - crooks steal e-mail addresses all the time.)
  • Who will benefit if this information is acted on? Manipulators’ favorite game is to pump up a stock they bought for almost nothing, then sell it after they create a buying frenzy based on false information. (This scam is known as pump and dump.)
  • Do I know anything about this company other than what is in this special information? Never invest in a company you don’t know.

Common sense would suggest that investment scams are easy to spot, however investors lose millions of dollars each year chasing “hot tips” or believing anonymous information.

Of course, if your broker or financial adviser is tempting you with this type of information, he may be breaking the law or violating ethical standards of conduct. Report the incident immediately.

©2014 About.com. All rights reserved.