August 18, 2021
The appetite for retail investment has skyrocketed since the latter stages of 2019. The original catalyst was the implementation of zero-based commissions trading however that quickly became old news as the outbreak of COVID-19 sent the world home. Stuck at home, working or collecting stimulus cheques, the era of retail investing was born. In the US, up to 25% of equity trades have been attributed to retail (Financial Times) and a whopping 45% in Canadian markets during peak months (The Globe and Mail). With millions of new retail investors entering the markets, social media and social news platforms became the avenues to learn, share, and discuss trading.
Social media and social news platforms such as Twitter, Instagram, TikTok and Reddit have seen an influx of personal finance and investment accounts in order to meet the demands of the latest savvy retail investors. TikTok, as of June 2020, had over 1.6 billion views of #investing. During the GameStop (GME) short squeeze, the name "GameStop" was searched over 600 million times in one day! The whole GameStop squeeze event itself, along with others that followed, was orchestrated in a subreddit of Reddit named r/WallStreetBets. The online community shares and finds information on stocks, and works together to combine knowledge (and finances) to beat the big guys - Wall Street. At the peak of the GME short squeeze, over 1.5 million users created accounts in r/WallStreetBets to watch and participate in it's unfolding.
There have been calls for regulatory oversight as some Reddit users continue to collaborate to drive the prices up on companies in order to squeeze out short-sellers. Since GameStop's wild beginning to 2021, from $40 to over $347 USD between January 20 and 27, rWallStreetBets has most notably been associated with other stock collaborations including AMC Entertainment, Clover Health, and Blackberry. The swift acting users have been working together to identify short interests in public companies and pounced on the opportunity to increase the value of the stock through options trading while simultaneously taking a jab at the big institutional hedge-funds.
The question is….is this a good idea?
The reality is, for every dream story of someone turning $50,000 into $1,000,000 in a week, there is 100 (probably more) other stories of someone buying into the hype and buying a stock they saw online at the peak and losing their college savings, not just their stimulus cheques. So, while social media is a valuable tool in order to find stock information, it is not a tool designed to make decisions with your own best interests in mind. Relying solely on social media for investment advice is so risky of a strategy that it shouldn't be called a strategy.
When utilizing social media, unfortunately many people are taking statements made as gospel and putting far too much faith in people who may have only been investing for a short period of time or that simply have no clue of what they're doing. ‘Social Media Investing’ has led to the creation of many ‘investment experts’ who aren’t experts at all. Not unlike how Google has made us all 'experts' in diagnosing our illnesses from the comfort of our beds. We’ve known for a long time now that what is displayed on social media is more often than not reality. Therefore, it is incredibly easy for someone to claim they’re an expert on something and encourage individuals to buy a stock - which has led to a huge increase in ‘pump and dump’ type scenarios in 2021. This has been particularly prevalent in the Cryptocurrency area.
Market manipulation and regulation?
There has been concern expressed about the market manipulation which can occur when combining mass social media and investing. There are viewpoints on both sides of the fence. Many ‘Wall Street’ professionals and investors would argue that going onto a social media platform and encouraging thousands of individuals to buy into a stock, which is being heavily shorted, is market manipulation. However, retail investors would argue that your professional investors are doing the exact same thing by releasing news articles on their thoughts on a stock in order to increase retail interest and liquidity, allowing them to sell out while the price climbs. Pre-market trading by professional and institutional investors is a very good example of just this.
Former SEC commissioner Robert Jackson has warned that some retail investors interact with the capital markets like a game. I don’t think many can argue against this claim, as there are a huge number of individuals investing money they cannot afford to lose in an attempt to make a quick buck. However, equally, there are also a large number of genuinely talented retail investors who are putting in the tedious work and long hours of research and due diligence in choosing their short-term and long-term hold stocks. These investors are then able to understand their positions and if they so choose, utilize the benefits of information overload from social media to turn a quick dollar.
Whether you’re a WallStreetBetter or a Wall Streeter - your due diligence should not be solely based on social media and social news platforms. Rather, you should take some time to learn how the markets work, how to trade, how to read financial statements and what sets a company apart from another in terms of a good stock pick. You should also determine your trade strategy or risk strategy; high risk, you're likely going to be looking into penny stocks and early stage companies (think start ups in mining exploration, tech, cannabis, biopharma, etc.), or low-risk, you're going to be looking into blue chip stocks and companies that are established and proven with year-on-year growth (think developed companies in mining, tech, tourism and airlines, etc.).
Whichever strategy you choose, and savvy investors would likely suggest a healthy combination of low- and high-risk, your due diligence and research is an extremely important step in investing that shouldn't be overlooked. And while you shouldn't rely on social media and social news solely, these platforms are very powerful and ignoring them as a retail investor could be foolish!