Dangerous traps to be avoided

Temptation from friends, office colleague or neighbors

“Hey bro, today I made 10,000 from the stock market”! You may find similar kind of statement from your friends or office colleague or neighbors. During bull market, such comments are quite common. The fact is that your friend won’t share the incident when he lost 10,000 from stocks. It gives us immense pleasure in sharing our achievements. On the contrary, sharing failure is shameful and hard.

Similarly in the stock market, it is a matter of immense pride to “earn 10,000”. Sharing such statement gives us much more delight than to earn it. On the other hand, nobody wants to share or accept his failure.

So, a statement like “I made 10,000” is just a single part of the story. Don’t jump into the stock market just because of such “partial information”. Don’t get excited with your friend’s success story. Don’t follow stock recommendations based on such stories over social media (Facebook, Whatsapp etc)


Temptation from your broker –

Your broker will offer reduced brokerage for frequent trading or large volume trading and is always ready to offer high margin money for trading. They may try to convince by saying “You have 20,000 in your trading account. Not an issue, you can buy shares worth 50,000 and sell it within 3 days to pocket more profit. Planning for intraday, well you can trade worth $$  – many brokers offer such terms. What they don’t mention is “earning for them” not “earning for you.” Apart from these, you may also receive SMS alerts or email alerts as trading tips from your broker. Have you ever seen, your broker offering any investment idea that is for 2-3 years holding period? They can’t offer because their broking business will dry up if you buy today and hold them for 2-3 year. On the contrary, wealth can only be created over the long run. In the short run, frequent trading can only increase your chances of losing money and increase broker’s earning.


Temptation from so-called analysts –

During bull market (while the market goes up) any Tom can consider themselves as an equity analyst. With the advent of internet, you will find thousands of self-claimed analysts over social media (Facebook, Whatsapp etc)  Whenever the market goes up, you will find television, newspapers, websites flooded with stock tips. Almost every analyst will draw a rosy picture and encourage you to invest in stocks. Surprisingly, the same analysts elope during a bear market (when the market goes down). The worst part is that during bear market these analysts will even mention avoiding stock market, fearing that it may fall further. The reality is that during the bear market, quality stocks are available at a cheap rate, and thus it is one of the best times to invest. Moreover, if you select quality stocks then overall market movement rarely matters. High quality businesses are always poised to do well in any  market situation. Don’t get carried away by any analysts.


Temptation from stock tips provider –

Nowadays, it is common to get phone calls, SMS alerts from various stock tips provider. Eye catching advertisements are so popular.  Remain alert whenever you notice high return promises. Many trading tips provider claim 50%+ monthly return from their trading strategy. If that would be the case then today every billionaire would be creating their fortune from stock trading. Reality says something different.



Overconfidence-

Suppose, you started investing during a bull market and successfully earned 45% return at the end of first year. All your purchased stocks were performing well. In such a situation, you may start thinking that you have mastered the subject very well. As the market moves up, so moves your confidence level, you keep on increasing your investment amount. You are now too aggressive. Suddenly market crashes and there comes a prolonged bear market. It is the bear market that separates intelligent investors from others. Don’t get lured and invest aggressively if you find your portfolio giving above average return during a bull market. The stock market doesn’t move linearly. It’s quite easy to make money during the bull run but difficult during the bear period. To become a successful investor, you need to learn the art of making money across all market situations.

Why paid trading tips are sometimes more dangerous?

Why paid trading tips are sometimes more dangerous?

You can lose your investment amount from free trading tips but what about paid tips. Surprisingly paid tips can make you suffer more because in this you not only lose your invested amount but also your subscription amount.

Just conduct a basic Google search. You will find several trading tips provider showcase fabulous past performance, promise 50%-100% monthly return and offer 2-3 days free trial.


Any stock tips provider can trap you from offering 4 days free trial tips.

Now, let’s see how this scam actually works. Initially I had 5,000 subscribers. I divide them into two groups (2,500 each) – Group A and Group B. I send “Buy” call to Group A and “Sell” call to Group B. Now, either the stock price will move up or down. So, one of them will be surely correct. I already noted which one is correct. The stock moved up, so “Buy” call to Group A was correct. I retain Group A and discard Group B. Now I have 2,500 subscribers (Group A) and repeat the process. Divide the 2,500 into two groups, send “Buy” call to one and “Sell” call to another. One must be correct. I again retain the correct one and discard the group that received wrong trading call. I repeat the same process for 4 consecutive days and end up with a group of 312 people who received all 4 correct tips. You may be the one among those 312 people.

Now, you can imagine how people get trapped into this scam. 

I can easily reach out to those 312 “Target” subscribers over phone call for follow-up and final subscription payment. Out of 312 even if 50% i.e. 156 subscribers finally opt for paid 6 months subscription, then also I can easily earn their huge fees. So, earning big money  based on nothing rather simply cheating others is a serious deal and an easy task. The beauty of this strategy is after getting 1 wrong call the same person is not receiving further calls. Out of the 5,000 group 312 subscribers are getting right on every occasion and it becomes very easy to trap them.



In real life you will find many trading tips provider claiming 90%- 95% success ratios. 

Interestingly all of them are claiming 90%-95% or even 100% success ratio and showcasing fabulous past performance. Subscription fees are always on higher side.

Next time onwards, if anyone mentions such bullshit like “90%-95% accurate trading tips for 50%+ monthly gain with 2 days trial”, simply ask why you guys don’t trade on your own. If your calls are so accurate then what’s the necessity of selling tips. If they still keep on talking rubbish, simply disconnect the call.

Why free trading tips are dangerous?

In your real life, do you get any quality products/service at free of cost? Nowadays, you need to pay even for pure drinking water!

1.   Why someone will provide money making ideas (stock tips) at free of cost? 

• Their motive is to bring back their existing customer.  
• None of them are doing charity. 
• None of them have the motive of making you rich. 

2.   You will get dozens of free trading tips each day.

• Your broker is also eager to provide trading tips at free of cost. 
• Moreover, dozens of websites offer bunch of new trading ideas everyday totally free of cost. 
• Including Facebook and Whatsapp groups, the list of free trading tips provider would be very long. 

3.  Let’s have a detailed look on their motive –


Motive #1 – Many operators provide free trading tips after offering the same to their paid clients.

Thus, stock price gets manipulated which in turn helps only their paid clients. Suppose I have two websites; freetips.com and paidtips.com. One is for providing tips to paid clients and another for free clients. However clients don’t know that both the websites are operated by the same person (or same group of people). So, what I am doing is, I am offering tips to my paid clients first. After their  purchase, I am distributing the same to free subscribers.

While, free subscribers start buying the same stock, the price starts moving in upward direction. Exactly at the same time, I am recommending “Profit Booking/Exit” call to paid clients. Thus, free subscribers get stuck at the top. So, my paid subscribers are getting good return at the cost of free clients. My motive is to collect more subscription fees from paid clients!  This way one can easily manipulate the price of lesser known stocks (specially, midcap and small cap stocks).


Motive #2 – Operators often offer free tips just to have a smooth exit at hefty profit.

The company is in microcap category and I didn’t hear the name before than that. Trading volume was much higher on both the days and stock price appreciated a lot. The pattern suggested that the operator had sent the same SMS to thousands of retail investors and many of them purchased the stock. The most surprising fact is that on those days three operators sold quantities worth of the same stock. So, operators were selling a particular stock and simultaneously sending SMS to thousands of retail investors to buy for “sure-shot” target of doubling the money!

In the next 10 days the stock was hitting lower circuit continuously and stock price reached to below a fraction of the previous price. There were no buyers for the same and as a result it got stuck in lower circuit. Thousands of retail investors got stuck lost around 90% or more and expressed their anger.

Nobody is there to save them. With the advent of mobile phone and internet such practice is quiet common. Be careful from the next time if you receive such SMS!



4.   Why paid trading tips are sometimes more dangerous?

You can lose your investment amount from free trading tips but what about paid tips. Surprisingly paid tips can make you suffer more because in this you not only lose your invested amount but also your subscription amount. 

Short-cut to figure out fake stock tips provider

Be aware of trading tips provider.

• Trading includes intraday, short term, Futures and Options. 
• Be aware of high return promises. 50%+ monthly return promise is the almost sure-shot sign of fraud. 

You should only choose equity advisors who provide investment tips with detailed logic and proper report on the company.

Most trading tips providers don’t provide any logic. They just mention “Buy with target and stop loss”. Ask them what is the rationale behind the call? Find out whether you are getting any satisfactory answer or they are just avoiding it?

Don’t get fascinated by the fabulous past records and few clients’ testimony. Those can be false also. 

Various new methods are coming day by day to trap innocent investors. So, always be aware.

Share market investment strategies: General planning tips

Share market investment strategies:  General planning tips

Never buy shares on tips or rumours alone.  Try and understand the type of business the company is involved in before you invest.

Remember, the higher the potential return, the greater the risk.  Real rates of return (i.e. adjusted for tax and inflation) average around 4 percent to 5 percent per annum over the longer term (seven to ten years).  Don't be misled by apparently impressive historical investment statistics:  past performance is no indication of things to come.

Keep your portfolio manageable by concentrating on a relatively small number of quality investments.  To do this, avoid acquiring lots of speculative stocks.

Check the liquidity of each investment (how long it takes for your money to be returned if you decide to cash out).

Understand all transaction cost, including early withdrawal penalties and tax implications.

Always maintain an adequate cash reserve to cover unexpected expenditures, emergencies and new investment opportunities.

To minimise risk and maximise growth, you should assess how much risk you are prepared to take and spread your investments across several investment types and different companies.



http://www.asx.com.au/courses/shares/course_09/index.html?shares_course_09

The 5 Most Dangerous Places to Get Investing Advice

By Hans Wagner Tuesday, November 16, 2010

Where do you get your stock investing ideas? Inspiration can come from many places, and while some resources make a lot of sense, others are a sure path to financial ruin. Here is my list of the five most dangerous places to get your investing advice.

1) Internet Message Boards
If you're currently turning to an online message board for investing advice, stop right now. The people posting on these web forums are notorious for making over-the-top predictions with little, if any, rationale supporting their claims.

The majority of posts can be broken down into a few categories: baseless claims, bragging, spam, and name-calling.

But the biggest problem with online investing message boards is the rampant manipulation. Some users post comments to purposefully manipulate the trading activity in their favor. For many companies, especially those lightly traded, it might be possible for the right comments to move the stock price in one direction or the other.

There are even cases where executives of companies use the message boards to influence the price of a stock by making inappropriate comments. Papers filed by the FTC revealed that for several years Whole Foods Market (NASDAQ: WFMI) CEO John Mackey posted highly opinionated comments under the pseudonym "Rahodeb" on a Yahoo! Finance message board.

Investors who make buy and sell decisions based on the message boards are playing a dangerous game.

2) Penny Stock Spammers
Right up there with the internet message boards are those annoying emails claiming that some new discovery (still widely unknown to the media) is about to send this $1.00 stock soaring into the stratosphere, quickly making millionaires out of anyone who buys shares.

That'd be fine, except for there's never very much information to substantiate the claim. But these emails are still going around, so someone must be taking the bait.

3) Hot Stock Tips
These aren't quite as bad as the penny stock spam emails, but that's not really saying a lot. These messages, usually filled with exciting language and testimonials from other investors, claim to have some inside information that, once disclosed, will make the stock double in price. According to the "researchers," only a crazy person would turn down such a sure-fire offer.

But the reality is if they did have inside information then someone has broken the law by disclosing it. Yet just like the penny stock spam, these hot tips don't ever seem to stop finding their ways into people's inboxes and mailboxes. While hot stock tips might be interesting, do yourself a favor and carry out the necessary research before making a commitment.

4) The Inexperienced Advisor Making a Commission on Their Sales
Would you take the advice of someone who was just beginning to understand stocks and the stock market? Can a newly minted broker address all of your questions in a thorough and complete manner? I know each broker must start somewhere, just be careful of the newbie who is selling what the firm is pushing.

Any time you rely on a broker's advice (regardless of their experience), remember to ask yourself if their suggestions are really right for your portfolio. This is especially true if the broker receives a commission each time he or she makes a sale. In Little White Lies from Your Broker, Amy Calistri urges investors to be wary whenever a broker is pushing a stock. "...Sometimes, a firm decides that its traders hold too much of a certain stock. And guess who has been told to help get rid of those shares? The broker." [Even the most well-intentioned brokers don't always deliver the straight scoop. Read Little White Lies from Your Broker to find out if your broker is watching your back.]

If you want to use a broker or advisor, be sure their interests align with yours. Many quality advisors do a commendable job. Most of them structure their compensation around your success, whether it is a straight fee or based on performance.

5) Financial News Networks
Don't get me wrong, I like CNBC and Bloomberg. They provide a quality product that includes views from each side of an investing issue. Many of their guests are very successful investors who deserve attention.

The problem arises whenever they recommend a stock -- many investors enter orders immediately. In some cases, you can see the price jump up on the ticker at the bottom of the TV. With millions of viewers, any comment on a stock can move the market.

Just because a noted investment advisor thinks a particular company has potential to appreciate, does not mean it is right for you. The traders buying the stock do not understand the fundamentals nor do they have a good entry or exit strategy.

Jim Cramer's Mad Money show is a good example. Jim features several stocks during his show. In each case, he exhorts his listeners to do their homework and not to buy immediately. Yet you can see the price leap up as many followers try to get in on each stock he commends.

The Bottom Line
Consider where your investing advice comes from. Is it from a reliable source? One with a proven track record of accomplishment? Does it fit with your personal view of the market? If you can answer "yes" to each question, AND you've already done your own homework, pat yourself on the back -- you've managed to navigate through the muddy waters of dangerous investing advice.

http://www.investinganswers.com/a/5-most-dangerous-places-get-investing-advice-1980

What to do with a "tip"? Do not Ignore, however study and scrutinise this further.

From my chatbox:

6 Jul 10, 11:38 PM
STOCK WATCH: Hi guys,tips of the year.....CRESBLD.....syndicate will goreng this stock soon...BEWARE!!!!!!!!
7 Jul 10, 08:26 AM
bb: stockwatch gave a "tip". My approach to tip is not to act on it. However, one may wish to study the stock further.
7 Jul 10, 08:26 AM
bb: Often when the "tip" reaches your ear, it is often at a late stage in the game.
7 Jul 10, 08:30 AM
bb: Don’t believe everything you hear In a market full of various news and hearsay, it is difficult to differentiate between facts and rumours.
7 Jul 10, 08:31 AM
bb: There are many instances where owners and syndicates who want to see higher stock prices purposely fabricate various news on potential contracts, corporate exercise, etc to analysts and reporters with
7 Jul 10, 08:31 AM
bb: .... with the intention to mislead investors.
7 Jul 10, 08:32 AM
bb: Every piece of news must be scrutinised to determine the authenticity and its impact on the earnings.
7 Jul 10, 08:32 AM
bb: Although this could be difficult in many cases, effort is still needed to avoid falling prey to unwarranted predators.
bb: One advice for investors is to only believe events which are more likely to happen, and only on those stocks where the management can be trusted.

Developing an approach to a 'tip'

What I did when someone suggested a stock to buy.

This is not uncommon. Your friend or a stranger will suggest a stock to buy.

My approach has always to take note of it. I do not dismiss these 'tips' straight off, unless I am very familiar with the stock already and have a preexisting valuation or opinion on this.

The better approach would be to just have a look at their 'tips'. During your free time, have a look at the stock's fundamentals. It only takes you a short time to decide whether you wish to study the stock more thoroughly or not.

Do not just accept tips from the professionals or the 'knowledgeable'. Embrace also the tips from the most unlikely person, the taxi driver, a cleaner, or a factory worker. You may sometimes be surprised the tip led to a 'gem' stock for you to invest in.

Three years ago, a stranger casually remarked that Company X's new business has started to prosper after a few years of slow growth. This company was a poor performer for many years. Many investors would have lost money in this stock for a prolonged period. It was a definitely shunned counter on KLSE. In fact, many investors would not even touch this stock due to their unpleasant previous experiences. Few had kind words for this company even in the discussions in the blogs. Various negatives were thrown up - it was either the quality of the management, the nature of the business, blah, blah, blah...

Anyway, looking at the fundamentals of this Company X, it was obvious that its revenues and earnings were growing strongly then. It was generating a lot of cash. It was also improving on its efficiency. Investing into this company over the last couple of years had been rewarding indeed, even though 2007 -2009 was a severe bear market.

What led me to invest in this stock? A casual remark from a stranger. Herein lies the lesson of this post.

Any tips? :-)