Somehow the lure and greed to buy ‘penny’ stock never ends. This is one thing which has no generational gap – for years and years, the need to grow rich fast by putting little money remains intact.

Take a look at stocks which have hit a 52-week high today; its 12-pages long. Traders seem to have run out of ideas to invest and once again, we all are inundated with ‘messages’ which urge us to buy a stock, dirt cheap but holding the promise of becoming the next Infosys or L&T.

Even a cursory look at the names of stocks hitting new highs shows us that speculative activity is at an all-time high. It is more of penny and junk stocks, with no real fundamentals to stand on which are hitting new highs. Take a look - https://www.bseindia.com/markets/equity/EQReports/HighLow.html?Flag=H

In the earlier days if we getting “tips” by word-of-mouth, today it is dominated by social media only. But that’s the only difference, otherwise they are completely the same – all “tipped” to be the next BIG thing – they all promise the same – buy now and see the money double up! And we all know that, that cannot be the sole criteria on which you can buy stocks.

So, how do you know recognize these “fake” stocks? Broadly, these are the characteristics:

Stocks are neither growth nor value

Governed by all hype and no logic

Usually overpriced

Erratic volumes

Spikes of rapid growth in short spaces of time

High volatility with valuations based around potential rather than financial

Fear of Missing Out or FOMO is the biggest motivator to buy

Slightest headwind and there comes panic selling

So should one fall prey to these stocks? Nope. Where there are no fundamentals, there is no question of putting money and where there are fundamentals, look at the valuation – the price far outweighs the fundamentals. This means we are setting up ourselves for disappointment at their next earnings call, and resulting in selling.

A huge social media hype doesn’t mean anything. Even if a company is tom-tommed about its future relevance – like electric car battery companies or has a visionary CEO or is at the cusp of bringing about a mega change across the world – like what Amazon did to online buying; we need to keep our feet firmly on the ground. These companies are moving up because of a future expected event but we need to examine whether the premium we are paying now is worth it.

These “tipped” stocks are today at huge unjustified premiums and that means, be prepared for extreme volatility. Identify the traits and once we know to separate the truth from the hype, we will do well.

PS: Aishwarya Technologies hit a new high today at Rs.4.11, while it has a track record of consistent losses. Isn’t it overvalued even at Rs.4.11?