When confronted by a friend or relative with a hot stock market tip, it’s very easy to be lured by the instant wealth on offer. Unfortunately most hot tips fail to perform and leave the investor with money tied up in a stock that is going nowhere or worse still, going down. How can an investor determine which stock to invest in before acting on a hot stock tip?
The same problem also often occurs when faced with an investor newsletter recommendation – there are a multitude of people who have the best stock market picks, but they all disappear into the woodwork once the share fails to perform. There are very few people out there who will stick around long enough to tell an investor when to sell.
Quick Signs That a Hot Stock Tip is an Unwise Investment
The Hot Stock Tips Price does not Display an Upward Trend in Price
An easy way to determine whether a share is worth buying is by having a quick look at its price chart. Stock price charts are widely available on the internet and good free charting services are available.
As a general rule, if the subject of a hot stock tip is making higher highs on its price chart, and lower lows, it could be worth buying. If the price is displaying a sideways graph, it indicates that the hot stocks insiders aren’t buying. If the people close to project aren’t buying, it should not be considered a worthy addition to the portfolio.
Another quick measure worth considering is to check whether the subject of a hot market tip is currently trading above its medium term moving average. This will let the investor know whether the stock price is better or worse than its average over the last ‘x’ periods of time. A 30 week moving average will give a good indication for most investors; however shorter term traders will need to adjust the time frame to suit their outlook.
Volume in the Stock Market Picks has not Increased
Looking for increased volume in stock market picks is a good way to determine if people ‘in the know’ are buying. It must be accepted that regardless of how good the source of the stock tip is, there will be a multitude of people closer to the project that will have heard and acted upon it before the average investor.
The buying (or selling) generated by these people will be evident in the volume statistic of the stock. If a stock's volume is not increasing along with the share price, it indicates lackluster interest in the share. Unfortunately, sustained price growth requires a large degree of excitement from buyers, and this will be clearly demonstrated by rising volume on the stock tips chart.
Knowing When to Sell a Hot Stock Market Tip
An easy way to know if it’s time to sell a stock bought from a hot stock tip is to determine a percentage the investor is willing to risk. For example, if $5000 was to be invested in a stock market tip, the investor might decide that $500 would be acceptable to lose. This represents 10% of the total investment, and requires the investor to sell if their investment drops to $4500.
Once the stock tip moves in the investors favour to $6000, the risk remains 10% of the investment. Now the stock will have to drop to $5400 before the share will be sold. In this way profits are allowed to grow, while at the same time the capital invested in the hot tip is protected.
To read more about stocks, trading and risk management please have a look at the following -
Investing in Shares - Managing Risk in a Stock Share Portfolio
Choosing a Trading Course in Forex, Stock or Options Trading
Stock Market Investing – Position Sizing to Minimise Trading Risk
Jessica Peletier - Jessica Peletier is a woman of varied interests. She is private investor with experience trading shares, CFD's and options, as well as ...
