What to do when someone gives you a stock tip?

What to do when someone gives you a stock tip?

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Someone told me today to buy Lithium Americas Corp –  LACDF. So this is what I did.

For Canadian Investors this company is also traded on the TSX  LAC.TO . If you decide to trade it you can avoid the exchange costs by trading the CAD ticker.

  1. Check out what the company does:
    • Yahoo has a profile section. You can search buy ticker symbol on yahoo  and go to the profile section to understand what the company is about and who its management team is . E. g: LACDF  is a resource company that explores for minerals based out of Vancouver.
  1. Check out the financials (quick check):
    • Financial Tab . I don’t see any revenue for the last 3 years. Net income is negative.
    • No major cash flow other than from financing.
  2. Check out who the major holders of the stocks are :
  3. Check out the opinions of others. Be careful here, some people try to manipulate the price by spreading rumors.
    • Conversations
    • This is a highly speculative stock that is under $1. It will be volatile and gains and losses will be loss. If interested in such a speculative stock – I would recommend investing only a low amount.
  4. Do a news search:
    • Just below the main page of the ticker symbol the news section is there . One of the news items that I could that probably triggered my friends recommendation is a feasibility study by the company.
    • I prefer to buy companies that is already making money. This to be seem to be extremely speculative and just a bit beyond my risk tolerance.
    • I usually also do google news search to see what else interesting shows up about the company. Google News Search
    • There isn’t much news about it other than the feasibility study
  5. Some important things to understand from the summary screen:
    • Average Volume – I like to see if there is a spike in volume compared to average volume. A spike usually indicates the price is either going up or down. There is an increase in volume compared to average volume.
    • I also check to see the 52 week range in price and compare the current trading price. You see if the stock is trading at the top of its range etc.
    • I also see the previous or current day’s range. Just to see to understand the range in the current trading price.
    • Beta gives you an indication of how risky a stock is. The lower the beta the less risky the stock is. 2.42 is a very high beta – indicating the speculative nature of this stock.
    • I also like to see the 1y target estimate. This is usually from the analysts that follow the stock.
    • I also use the interactive chart on the right of the screen to understand how the stock has behaved in the past, how long it has existed etc. This stock has been around 2008 and had moved between 10 cents to over $2.

Based on my quick checks – I am going to pass on this stock. Simply because it is too speculative in nature for my risk tolerance and its value is from potential vs real earnings!

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