Want a Hot Stock Tip?

How many times has an email, a text message, or an acquaintance ask you this? I too once thought the stock market was a tool that could bring in great rewards to anyone willing to risk a few bucks. This was partially due to a former Vice President and Director I worked for during the incredible Internet bubble days of the stock market. These two were constantly telling me to go look at stocks that had risen by 2-10 multiples within a few short months.

Of course, neither of them had invested prior to the stock's rise. I believe they did invest somewhere near the high water mark. This is from whom I learned my stock trading scheme - buy high, sell low. While I never invested retirement money, I was tempted. However, I would occassionally pull a few hundred to a thousand dollars from yearly bonus checks to invest in what were "sure things".

The best example of a sure thing was the stock for Focal Communications. My vice president pointed me to the stock and encouraged me to cash in on what he believed was a sure thing. He once managed the owners of Focal Communications and was very familiar with their business plan. The stock was originally offered at $2 a share and had grown to $10 a share during the first 6 months of operations. I was assured this performance would continue for a while.

I bit. Afer all, my VP was a seasoned telecom executive who knew the owners of Focal and was investing his own money. If that is not a sure thing, I do not know what is. I bought 50 shares at $10 and waited to cash in big. Sure enough, the stock continued to rise. I was encouraged when it hit $12, and then $14 a share. It seemed the only decision I needed to make was when I should cash in. But my thought was that a stock that had increased 5 fold in 6 months, and was still increasing could be a gold mine. I waited. The bottom fell out.

Over the next 6 months, the stock tanked. At one point Focal performed a 50:1 reverse split in order to keep the stock price > 2 cents. I had one share worth $1. Later, even that value was lost (technically I still own the share). The lesson was learned. I was completely oblivious to the real risk that single stocks could decline 100%. All I was seeing was stocks out performing all other investments.

Want a hot stock tip? Don't buy single stocks.