www.InvestmentGuide.co.uk www.InvestmentGuide.co.ukShares A Beginners Guide to Making Money Contents
There are plenty of people eager to tell you how to make money out of the stock market; city editors, financial consultants, tip-sheets. They are all experts and they all purport to be in the know. Why not follow their advice and forget about studying company reports and the state of the market?
Some years ago the London Business School carried out a survey on New Year tips given in newspapers such as the Daily Telegraph, the Sunday Times, the Economist and in some well-established tip-sheets. Their verdict was that the tipsters, in general, did slightly better - but only slightly - than if they had used a pin to pick similar sized companies.
Tip sheets
Tip-sheets have enjoyed great popularity. They contain about eight pages, rarely more, and are published weekly. An annual subscription costs from £40 to £150 although they often make introductory offers. The sheet is sent direct to you through the post.
Some of them have been going for many years. Others have sprung up as interest in the stock market has increased. A good percentage of them disappear after a while, depending on how well their tips work out. They are soon replaced by new stars offering even greater rewards.
Their advertising can be persuasive, showing examples of tips which have risen spectacularly. They do occasionally pick a big winner. The law of averages could have something to do with it. But their losers are forgotten - except, of course, by the poor people who bought them.
The big danger is that they tend to recommend small companies, which have relatively few shares on issue. Remember the advice previously quoted warning the speculator to steer clear of small inactive shares.
Tip-sheet editors like shares which have a thin market because a small increase in the demand can send the price soaring. They can then say how wonderful they are. Unfortunately, the process can work equally quickly in reverse.
If you do take the advice of a tip-sheet you must move very quickly. Even so, you are unlikely to be quick enough. You are competing with the real professionals. To quote one leading city expert: 'If a share is tipped, people are on the telephone by 8.30 am on the morning the tip-sheet appears. The share may rise rapidly in the first hour of dealing, but by ten o'clock the game is over.'
There is also the chance that someone involved in the production of the tip-sheet, a printer, distributor, or heaven forbid, a contributor, has already bought the shares and given the game away beforehand. You would then buy right at the top.
Not all tip-sheets are irresponsible. Their tips may well be based on sound arguments, but one must ask the obvious question: if a tip-sheet contributor has a sure thing why does he want to share it with others? Why does he not keep it to himself and make a killing? Such generosity runs against human nature.
'Inside' information
This question of reliability also applies to the chap on the 19th hole of the golf course or in the local pub who got a tip from a friend in the city who really is in the know. Such tips should be scrupulously considered. They could be dangerous and it is now illegal to act on them if they are genuine inside information. Even assuming there is any foundation in the story it is extremely unlikely that you will be within the first thousand people to hear about it. These stories go round the market like wildfire.
The nature of the market is to discount the venture. When the news is out - and the future has become the present - the game is over.
After the dividend announcement has been made the question is not how much profits have increased in the past year but how much more will they increase in the year ahead. This may give you another chance to make money. If the price falls after the dividend announcement so that the shares are standing below value but in your opinion the future for the company is bright, then this may be the time to get in on the cheap.
An old market maxim runs: 'Where there's a tip there's a tap.' This means that tips are sometimes started by someone who is anxious to unload a batch of shares in that particular company. Rumour that there is about to be a take-over bid for the company is a favourite ploy.
Never follow a tip blindly. Buy only when you consider the share meets all your criterion for a sensible purchase. Then, if the rumour turns out to be false you are not left holding a dud.
Judy Garland once said: 'I was advised those stocks and shares would make me a lot of money on the side. After ten years all I had on the side was appendicitis.'
Last updated 2
January 2009.