InvestorQ : Why do people give tips on stocks? Is there any specific reason?
Maniish Lofar made post

Why do people give tips on stocks? Is there any specific reason?

Maniish Lofar answered.
3 years ago

Most tips come without any accountability and hence they are dangerous. Your advisor or your broker will give you an investment advice and take responsibility for the same. No tipster will do that. Let us see some reasons why people give tips on stocks.

Most likely, they are trying to make a name for themselves. In the competitive world of stock market advisory, most advisers virtually act as an active machine to disseminate tips. In a bull market, the bet is that even a monkey portfolio will outperform the market. So, why not take a chance? You have to avoid these advisors.

A mid-cap company has many reasons to keep their share prices buoyant. It helps them get better borrowing value against shares. It gets them a better price for a rights or a new issue. These networks are typically cultivated by brokers and promoters to enhance the stock price. So if your tipster is talking about an unheard of company or a small struggling company with a turnaround story, you have got to be doubly careful.

Thirdly, it is possible that a large investor or the promoter group itself is trying to exit the stock and wants to avoid price damage till the exit is completed. This is common among many small and medium sized stocks. As liquidity gets absorbed in the market, the exit is smooth and also does not raise any suspicion. This was the strategy that was followed in volatile stocks in the peak of 2000 and also in 2007.

Many of the tips are nothing but riding piggy back on another famous investor. It is so common for someone to give you a tip-off saying that another famous investor has been accumulating it. Please remember that no successful investor is daft enough to leak their trading strategy beforehand or let others make money. Also you don’t know the intent behind the purchase of the large investor and you also don’t have the same risk appetite as the large investor. So don’t fall for this replication story.

There is another very common reason why such tips are given. Testing retail appetite is another reason for tips. This is more in case of new ideas or emerging industry segments like biotech, ecommerce. The idea will be to eventually offload the stake through an IPO. However, a longer case build-up may be required in such sectors. You don’t have to be the guinea pig in such cases. We have seen that happen in many stocks in the past.

Finally, the very common reason for tips in the midst of a bull market is that most likely, someone missed the bus and is giving sell tips to accumulate the stock at lower levels. This normally happens when we sell early, only to regret later. Similarly people who bought higher and have faced price erosion will also try to give buy tips to build interest in the stock.