As more and more people turn to social media for news and other important information, the SEC is warning against investing in the “heavily-promoted companies with smaller market capitalizations” often “discussed in social media, news aggregators, investment research websites, online investment newsletters, ratings websites, message boards, chat rooms, and discussion forums.” Such social media investment advice can lead to the following risks:
- Investing in Bubbles or Manias. Financial “manias” or a “bubble” is the rapid rise in the price of an investment, reflecting a high degree of collective enthusiasm or exuberance regarding the investment’s prospects. This rapid rise is usually followed by a contraction in the investment’s price. The contraction, or “panic” occurs when there is wide-scale selling of the investment that causes a sharp decline in the investment’s price.
- Momentum Investing. Another investing strategy that can pose high risks for retail investors is “momentum investing.” An investor using a momentum investing strategy seeks to capitalize on the continuance of existing trends in the market. A momentum investor believes that large increases in the price of an investment will be followed by additional gains and vice versa for declining values. If that belief turns out to be incorrect, it can lead to significant losses.
- Noise Trading. A third related strategy is “noise trading.” Noise trading occurs when an investor makes a decision to buy or sell an investment without the use of fundamental data (that is, economic, financial, and other qualitative or quantitative data that can affect the value of the investment). Noise traders generally have poor timing, follow trends, and overreact to good and bad news in the market.
The SEC advises that fraudsters may work to disseminate false information via social media and elsewhere in order to manipulate the market in “pump and dump” and other similar schemes.
For more regarding prudent investment practices, explore the SEC’s Investor.gov.
If you’ve suffered losses from a suspected “pump and dump” scheme or other fraudulent schemes, Fishman Haygood’s experienced lawyers may be able to help. Please contact us to discuss your potential claims.