Rumortrage

We bought stock in SoleHats, Inc. a few years ago, thinking it would be a real moneymaker. After all, who wouldn’t want to own a hat that could double as a pair of shoes? We thought it was an inspired concept. Unfortunately, no other investors really seemed to think so, and pretty much all the stock has done since we bought it is...go down. We’d love to just dump it all, but the way the stock is trading right now, we’d take a huge hit.

That’s when we come up with a brilliant plan: we’ll start a rumor that Adidas is planning to buy the company. The stock price will skyrocket. Then, right before everyone figures out it’s all a big lie, we’ll sell our shares for a huge profit and ride off into the sunset on our piles of greenbacks. In other words, we’re going to inspire some “rumortrage”: trading activity based on a rumored takeover. Not a real takeover. Not a takeover that’s being negotiated, but may or may not actual happen. Just a totally rumored takeover.

There are a couple ways we as investors might be able to tell if a hot stock tip we hear about is worthwhile, or if it’s just some rumortrage (that’s “rumor” plus “arbitrage,” btw) that we should ignore. First, if amidst all the frenzied buying there are plenty of people selling too, it might indicate that the tip or rumor won’t pan out. Those who are already invested in the company know it ain’t true, and they’re going to sell what they’ve got before everyone else knows it. Second, some advisors say we should be a wee bit skeptical of any big business bombshells dropped on a Friday, because someone might just be trying to generate some buzz before the markets close for the weekend.