When everyone you know is gossiping about the latest hot stock, it can be difficult to resist the urge to buy. Maybe your neighbor invested huge amounts in some fancy new bioethanol stock. Perhaps the newspaper is praising a certain company as “the next big thing.”  Regardless of where the stock tip comes from,  investing in stock tips can easily have negative consequences.

Following the hot stock tips is almost always a bad idea for a number of reasons. The first is very simple. Many stocks become hot because the company is liked by the people . Unfortunately, sympathy and financial viability are two very different qualities. If a company does not operate under a sound business plan, it will not do well in the long run, no matter how many investors put their money. The technology bubble of the late 1990s is an excellent example of that. During this period, it became relatively easy for almost all Internet-related companies to acquire funding. This has led to dozens of well-financed companies with business plans that do not actually include practical strategies for becoming profitable. While a few healthy companies pulled through, a large number of companies that went public during this period are no longer in existence.

While it may be possible to avoid the trap of accepting stock suggestions, there is an inescapable truth. Unless you know a person who is financially active and very literate, your ‘hot-tip’ will probably ‘stone cold’. Since stocks can be traded instantly, new information is reflected very quickly in the price of an asset. If you’ve heard a bit of stock in the newspaper, investment newsletter or a friend, there’s a good chance that many others have heard the same thing, and that the market price has already adjusted to these expectations. Although the stock tip you received was followed up by enough investors, prices could temporarily become inflated, causing even greater losses when prices readjust.

Despite the fact that most hot stock tips is not worth acting on, invest in individual stocks can be a fun and rewarding hobby for those who can afford the risk. Since hot stocks are so hard to choose, however, it is important to be aware of the true risks and significant. Do not be seduced away from sound investment principles to follow up the latest hot stock tip.