Sameer: Hey Niraj, are you applying for this IPO of XYZ Ltd ?
Niraj: No Sameer. By the way, what is the business of this Company XYZ ?
Sameer: I have no idea. But I believe the stock price will increase. Lot of my friends are saying that.
Niraj: Don't Fall prey to Herd Mentality Sameer. Many a times people mindlessly invest in stocks without knowing anything about their business and then get brutally punished for it.
Sameer: I don't believe this. Can you give me any examples ?
Niraj: There are Several Examples.
Example 1: When lockdown-1 started in 2020, people started using zoom meetings extensively. As a result, people blindly started buying stocks of "Zoom Technologies Inc." whereas the company which owned Zoom Meetings software was called "Zoom Video Communications". The Stock price of "Zoom Technologies Inc." increased just because it had "zoom" word in its name (although this company wasn't remotely connected to zoom meetings company). The stock price of "Zoom Technologies" fell from USD 20 to zero in no time, as soon as people realised that it is not the right company.
Example 2: In lockdown-2, India was facing shortage of oxygen cylinders in hospitals. People blindly started buying stock of company called "Bombay Oxygen Corp Ltd" which was remotely not connected to production of oxygen cylinders. The stock price fell by 50% as soon as people came to know this.
Sameer: Oh My God !! This is So true and Shocking. But isn't this the mistake of Companies also to keep misleading names?
Niraj: Let us assume that this is the mistake (or ploy) by the companies to trap the investors. Still, is it not investor's responsibility to do some basic research on the stock, before investing in it?
Sameer: Doing in depth research is not everyone's cup of tea, Niraj. What should a layman investor do ? They get confused between similar names and fall for it.
Niraj: Sameer, just because it looks similar or sounds similar, does not mean it's the same. One has to go deeper before investing hard earned money. If you are not an expert in it, get professional guidance. But Don't put your hard earned money blindly.
Sameer: You are absolutely right Niraj. We can't afford to invest blindly and then blame others. We have to either do our homework well or get a trusted advisor.
The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP, AFGP) is CEO with Nidhi Investments, Mumbai. His articles have a readership from 78 Countries across the Globe. He may be contacted on CEO@nidhiinvestments.com if you have any questions.
(The views mentioned in the article are personal opinion of the author)