| When everyone you know is talking about the latest | | | | public during that period are no longer in existence. |
| hot stock, it can be difficult to resist the urge to | | | | While it may be possible to avoid the pitfalls of |
| invest. Perhaps your neighbor doubled her money in | | | | accepting stock tips, there is one unavoidable truth. |
| some fancy new biomedical stock. Maybe the | | | | Unless you are acquainted with very financially active |
| newspaper is touting a certain company as "the next | | | | and literate individuals, your 'hot-tip' will probably arrive |
| big thing." Maybe you saw it in an investment | | | | 'stone-cold'. Because stocks can be traded instantly, |
| newsletter. Regardless of where the stock tip comes | | | | new information is reflected very quickly in the price |
| from, putting your money on the line can easily have | | | | of an asset. If you hear about a stock tip in the |
| negative consequences. | | | | newspaper, investment newsletter, or from a friend, |
| Investing in stock tips is nearly always a bad idea, for | | | | there is a very good chance that many others have |
| a number of reasons. The first is very simple. Many | | | | heard the very same thing, and that the market |
| hot stocks become hot because people like the idea | | | | price has already adjusted itself to those |
| of the company. Unfortunately, likeability and financial | | | | expectations. In fact, if the stock tip you received |
| viability are two very different qualities. If a company | | | | was acted on by enough investors, the price could |
| doesn't operate under a sound business plan, it won't | | | | become temporarily inflated, causing even bigger |
| do well in the long-run, no matter how many | | | | losses when prices readjust. Today's hot stock tip |
| investors put their money into the company. The | | | | could be tomorrow's Enron. |
| technology bubble of the late 1990s is an excellent | | | | Despite the fact that most stock tips are not worth |
| example of this fact. During that period, it became | | | | acting on, investing in single stocks can be an |
| relatively easy for almost any internet-related | | | | enjoyable and rewarding pastime for those who can |
| company to acquire funding. This led to dozens of | | | | afford the risk. Because hot stocks are so difficult to |
| well-funded businesses with business plans that didn't | | | | choose, however, it is important to be aware of the |
| actually include concrete strategies for becoming | | | | very real and significant risks. Don't allow yourself to |
| profitable. While a few sound companies pulled | | | | be seduced away from sound investing principles to |
| through, a large number of the companies that went | | | | act on the latest hot stock tip. |