Experts say that investors who are serious about making money from stocks should ignore SMS tips.
Your phone beeps. It’s an SMS from a stock broker. Top funds and financial institutions are gorging on shares of an NBFC. The stock has risen dramatically from Rs 3-4 levels to touch Rs 13 and the broker vouches it will only move up from here. That’s the fantasy he’s peddling. The reality is that shares of Viji Finance are down more than 40% since the SMS tip on 25 January.
This is not an isolated case. Anybody who dabbles in stocks gets such unsolicited tips. Investors who took the bait and bought Viji Finance shares are not even half as unlucky as some others. The shares of Edynamics Solutions and Steel Exchange of India have dropped over 75% since they were recommended through SMS tips.
Tipping point for stock investors
All these stocks recommended by tipsters have fallen badly
These SMS stocks have declined at a time when the overall markets have been doing exceedingly well. Even after the post-Budget correction, the Nifty and Sensex are trading 10-12% above their June-July 2017 levels. Who are these SMS tipsters and why do they target small investors? The tips come from cartels of brokers and operators involved in stock price manipulation.
Their modus operandi: first pump up the stock price of dud stocks and then lure gullible investors to buy them at high prices. The net is cast very wide. The operator cartel gets hold of contact details of clients from stock brokers and trading portals and carpet bomb them with tips on SMS and social media. The math behind the strategy is quite alluring. Even if 5% of 10,000-odd recipients take the bait, they have around 500 investors to milk. These investors are goaded into buying the stocks the cartel wants to offload.
Surprisingly, not only newbie investors but also seasoned veterans sometimes fall for these ploys. It is easy to fool people into thinking that they are buying undiscovered gems at rock bottom prices. Experts say that investors who are serious about making money from stocks should ignore SMS tips. It is better to invest in a bluechip stock even if the price is high than buy low-priced junk. “The love for low-priced stocks is the tragedy of the small investor. After he misses the opportunity to invest in good quality stocks at low prices, he jumps in late and invests on the basis of tips from dubious brokers,” says veteran investor Vijay Kedia.
Pump and dump The modus operandi of stock manipulators
1. Cartel of operators identifies a small company with a very low market cap.
2. They pick large number of shares of the company.
3. Then start trading those shares among themselves to make it seem that the stock is in high demand.
4. They spread positive, but false, news about the stock they have bought in large numbers.
5. Investors get SMSs, whatsapp messages and emails on how the stock is poised to shoot up.
6. After the initial surge, the stock price drifts down and eventually reaches its original level.
7. Once their target price is reached, the operators and promoters start ‘dumping’ the shares.
8. In some cases, it may even fudge its accounts to suggest a financial turnaround.
9. The company may also join in with positive announcements of large orders, new products, etc.
10. The triggers are usually merger or takeovers, big orders or significant policy changes on the anvil.