You can buy stocks that zoom to double the price within a few days. What better way to make a quick buck?
But that does not mean the party will end well for you.
My experience has shown me the hangover can hit hard and long.
1995
My friend and I had Rs 3,000 each that we wanted to invest. We wanted to double it as soon as possible.
My friend's sub-broker said benignly, "No problem."
Off we went to his house. There he was, with his magic wand.
Two companies in Andhra Pradesh would help us realise our dreams, he proclaimed confidently: Reddy Foods and RCS Vanaspati. I chose the former; my friend, the latter.
Reddy Foods had bagged a huge order and the other had set the markets afire thanks to the news that the company would issue bonus shares soon. Bonus shares are given free of cost to those who already own shares in the company.
The rumour was they would be given in the ratio of 2:1. That is, two shares free for every one share owned by the investor.
1996
The stocks were delisted from the National Stock Exchange, leaving our dreams just that: dreams.
Generally, the Securities and Exchange Board of India de-lists a company if it does not pay listing charges (an annual amount to the stock exchange) and fails to comply with other SEBI guidelines.
Today
The same phenomenon seems to be in vogue in the recent bull frenzy. Stocks and companies whose names you could conjure up only in your dreams (or wildest nightmares), are hogging the limelight by offering unheard of returns.
The logical question: why? Why are unheard of stocks climbing greater heights each day?
Before you attempt to answer this, let me assure you the companies undergoing such upheavals are not witnessing any fundamental changes in their performance, sales or profits. They are just riding a crazy, irrational market boom.
The modus operandi
Companies with shady promoters wait like prowling tigers for the markets to boom. Once this happens, they surreptitiously start advertising their quarterly results with inflated profits.
Next, they spread word in the markets through their preferred brokers (in case fools like me ignore the newspaper ads) and sub-brokers. Soon, this stock becomes the buzzword among a few of the broking community.
It does not take much time for it to translate into a 'hot tip'. If you are a day trader (the breed that buys/ sells stocks during the day and squares up its position by end of trading that day when it either books a profit or a loss) or if you have visited any trading terminal ever in your life, you will know what that means.
Day traders thrive in such markets. These hot tips are too irresistible for them to ignore. Once at the trading terminal, these tips spread faster than wild fire.
Soon, everyone is talking about the stock. Everyone wants to buy it.
This causes the price to climb. The brokers and their coterie buy the stock and drive up the price even more.
This is when the retail investor (people like you and me) begin to hear about it. Eager for a slice of this cake, we buy the shares too. When the price climbs to a substantial level, the brokers sell.
Then, the price begins to tumble and the poor (or rather naïve) retail investor is left with the dud stock.
Don't believe everything you read!
Don't assume the advertisements you read about various companies in the national dailies are authentic.
The advertisement might say the company is considering a bonus issue or will bag a huge sales order.
Reality? Everything is just tentative, at the least.
Pore through the fine print. If you read a tiny line that says, 'Not a statutory release', you have reason to be wary.
A statutory release pertains to information that might have an impact on a company's financial performance. It is information that all the stakeholders of a company must know. To win investors' confidence, SEBI has made it mandatory for a company to declare such information.
You will find the statutory releases that give you the actual information you need in an obscure or regional newspaper not widely subscribed to.
So next time you see such an advertisement in one of your favourite pink dailies, don't get too carried away by the carrots these companies dangle.
Note: I am not saying all companies who advertise their quarterly results; publish bonus shares announcements; talk of bagging huge contracts or orders from clients are out there to fleece you. There are a few honest Joes out there.
Avoid hot tips
Doesn't matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. They will land you in a soup. When you hear of a 'hot tip', run away.
Gather all the information about the company you want to invest in.
And, yes, maybe it is time to junk all those shares you picked up earlier on hot tips. With the Sensex touching such highs, you may never get a better price for them!
Illustration: Dominic Xavier
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Amit K is a keen market watcher. The views expressed here are his own.