Seven Steps for Handling Stock Tips

Pssst! Buddy! Have I got a tip for you! This is the next red-hot stock, and it's a potential 1,000% gainer. Remember the last hot tip? You could have made 6,376%. Do not miss this next moneymaker!

Yes, stock tips are hot again. Activity on the Nasdaq bulletin board (OTC:BB) is on the rise -- volume has exploded nearly 40% recently (see chart below). And that is over the bulletin board volume record set in February.

I refer not to the small-cap stocks on the Russell 2000 but to the tiniest of them all -- the delisted and Pink Sheets stocks. They have become movers once again, and that often means bad news for unwary investors.

I don't mean the so-called spam stocks either, which TheStreet.com's Kevin Kelleher revealed to be huge money losers.

No, what I am referring to are the word-of-mouth stock tips passed from person to person. Emails and instant messaging now help to spread the word faster than ever before.

The vast majority of these "tips" are for horrific little stocks that don't have a snowball's chance in hell of ever amounting to anything, at least not on a sustainable basis. Many so-called tips are nothing more than the work of paid promoters whose sole role in life is to run up the price of some worthless paper so sellers can exit at a higher price while the "tippee" is left holding the bag.

Yes, you read that correctly.

Stock promoters operate in the shadows, just beyond the reach of the NASD and the Securities and Exchange Commission, avoiding regulatory scrutiny by exploiting the fine line between legitimate investor/public relations and outright touting.

Under a variety of different names and aliases, touts often post breathless tales on the Yahoo! and Raging Bull message boards. Anyone who posts factual information that contradicts the story will be harassed on the boards and shouted down. Typically, stock promoters have a broad network of followers -- traders who can get in and out early of a promoted stock, pocketing a quick buck and leaving the unsuspecting retail investor holding the bag.