Hot tips

A "hot tip" is somebody telling you a stock is about to move, usually without you asking, and usually without you knowing why they are telling you.

The booklet's warning is blunt: do not rely on making your investment decisions on hot tips. Its reason is specific — the person giving the tip may themselves be trying to offload securities that are not easily marketable, and your buying interest is exactly what lets them do that.

The booklet goes further than just discouraging tips. It treats spreading them as illegal, and tells investors to report it to SEBI rather than simply ignore it.

The booklet's own words, from the Do's and Don'ts for investing in the securities market: "Do not rely on making your investment decisions on hot tips as a person who wants to offload securities which may not be marketable may be indulging in it. Disseminating hot tips is also an illegal activity which should be reported to SEBI."

This sits alongside two related Don'ts in the same list: don't fall prey to Ponzi schemes, unregistered chit funds or unregistered deposit schemes, and — in Chapter 11's Do's and Don'ts for dealing with Investment Advisers — "Don't fall for stock tips offered under the pretext of investment advice."

The underlying reasoning connects to Chapter 5's advice on researching before investing: "Investment in securities market should be done after carrying out research on the background of the company, future prospects and financial strength of the company" — a hot tip is the opposite of that research.

Vikram gets a message on a trading app group: "Buy XYZ Ltd today, target 40% gain in a week, guaranteed." He does not know who sent it or why.

He puts in Rs 2,00,000 based on the tip alone, without checking the company's financial strength or its business. The share does rise for two days, then drops sharply as the original promoter — the very person who seeded the tip — sells a large illiquid holding into the buying interest the tip created. Vikram is left holding shares worth Rs 1,20,000, an Rs 80,000 loss on his original Rs 2,00,000.

Had Vikram instead reported the unsolicited tip to SEBI, as the booklet instructs, and researched the company through its published financial statements before acting, he would have seen the mismatch between the claimed 40% guaranteed gain and the company's actual financial strength.

Chapter 5's Do's and Don'ts for investing in the securities market names hot tips directly, and Chapter 11's parallel Do's and Don'ts for dealing with Investment Advisers repeats the caution in a different context. Expect the exam to test that disseminating hot tips is illegal and reportable to SEBI, not merely inadvisable.

• Disseminating a hot tip is illegal, not just bad advice — the booklet treats it as an activity to report to SEBI, the same seriousness as a Ponzi scheme or an unregistered adviser.
• The stated motive for a hot tip is offloading unmarketable securities — the tipper's interest and the recipient's interest are opposed, not aligned.
• A "guaranteed" gain attached to a tip is itself a red flag shared with the booklet's warning signs for a Ponzi scheme — no investment is risk-free.
• Do not confuse a hot tip with advice from a SEBI-registered Investment Adviser, which the booklet actively encourages seeking out, in direct contrast to unsolicited tips.