Mad Money

Tips Are for Waiters, Not Traders

You should never take or listen to stock tips, Cramer says. You shouldn’t try to get stock tips. Tip generously whenever you go out to dinner, but that’s the only kind of tip that’s allowed in the People’s Republic of Cramerica.

What’s so bad about tips? When you hear a rumor, say, that Nokia is going to buy Research in Motion, the tip may be true, but most likely you’ll believe it because you want it to be true. You know that takeovers are the best moves, and you want the big score.

Tips Are for Waiters

But Cramer says that bells should immediately start going off in your head. Ask yourself some key questions, such as, “How did this person get such great information?” The tipster would have to be an insider to know a deal of that magnitude was going down. If that’s the case, he’s breaking the law by telling you. And if you trade on that info, you could get into a lot of trouble.

If the tipster is not an insider, then there’s just no way he could know that Nokia’s trying to take over RIMM. People who aren’t insiders just don’t have access to that information. Do you really want a tip from somebody who doesn’t know anything?

Here’s the worst part: When someone is passing out stock tips even though he doesn’t truly know anything, that person has an agenda. Rumors don’t get started for no reason. If you get a tip, it’s probably because somebody’s in a bad position. So if you hear that Nokia’s taking over Research in Motion , you can assume that person has a load of RIMM stock he’s hoping to sell into strength.

We all would love to get a real tip, but those don’t exist. As far as Cramer’s concerned, if you get a tip, it’s either illegal, incorrect or straight-up manipulative. None of those things is good for you.

Bottom Line: Stock tips are tempting, but they’re not worth listening to. Tips are for waiters, not traders.

Questions? Comments?