Your Friend’s Hot Stock Tips Are (Probably) Worthless. Here’s Why

When a friend or relative comes to you with a “hot” stock tip, it’s easy to get excited. After all, if they’re giving you information on something with potential to “go big,” there’s a chance you could make some easy money, right?

Not so fast.

Those overeager investor friends of yours are enthused about their stocks of choice because they have to be. They invested money into specific companies, and if they tank, they can lose money. This could put your financial standing in jeopardy if you follow their advice. Plus, there’s no such thing as easy money.

So what do you do instead of listening to your friend’s stock tip? Let’s take a look.

Do your research

This is the first thing you should always do before you even think of investing. Don’t just blindly buy into a stock or any type of security, no matter what your friend tells you. Look at the stock’s history and see how it performed in the last week, month, or year. Search for any news on how the company is doing in terms of sales, any court cases against it, or how professional analysts feel about the company.

Lastly, see what thousands of other investors have to say about it. Though no one can predict the future, measuring investor sentiment in a stock could also save you from a bad buy. When you’re informed, you can make careful, calculated choices about what to invest in…and what to avoid.

Don’t gamble

One could argue that putting any money into the stock market is risky, as you don’t know if you’ll end up with big returns or sustained losses. Yet while investing in stocks does involve a certain degree of risk, there are far riskier things to put your money in. Penny stocks, for instance, are a favorite of traders looking to get rich quick. These traders often pass off “hot tips” to friends and family to get them to invest in the stock. This would effectively pump up the price of said stock, which the scheming trader could then sell at a profit.

Not all penny stocks work this way, and not every person putting money into penny stocks is trying to screw you over. Yet due to their high volatility, higher chance of scams, and decreased regulation, they’re probably not something you want to mess with as a new investor.

Invest in what you know (or what you’re comfortable with)

Know a lot about technology and the many companies in the field? Consider putting your hard-earned cash into the stock of an up-and-coming chip maker or software company that’s actually turning a profit and shows no signs of slowing down. Well-versed in the pharmaceutical industry? Pharma stocks are doing particularly well now, and finding an industry leader or up-and-comer to invest in could be a lot of fun.

You always must do your research, of course, and returns aren’t guaranteed. But if you’re a so-called “expert” on a business sector, consider focusing your investments on that sector.

Leave the decisions up to people more qualified to make them

You don’t have to know what to invest in to invest. You can simply buy into a mutual fund and have the fund managers do the picking for you. Mutual funds require nothing more than a check made out to the fund to be deposited in your account and invested. You simply wait for your monthly or quarterly statements, watch how they perform at the end of the day, and call the fund manager in charge if you have any questions or concerns.

Mind the fact that mutual funds still rely on someone else picking stocks for you, so nothing is foolproof. Those investors could be wrong. Unlike your friend, however, mutual fund investors just happen to be a bit more knowledgeable about the market than you.

You should never make an uninformed investment. Every dollar you put into the stock market should be backed by research, analysis by experts, aggregated analysis by other investors, and your own expertise. When you make careful choices as an investor, you’re a lot less likely to make bad investments.

Your friends, however, could be correct on their stock tip. Just make sure you look into it before you decide to make the same investments as them, and don’t succumb to any peer pressure (seriously) to invest in something you don’t know. If they’re really trying to get you to buy something and they won’t let up, then you should take that as a warning sign that something is amiss.