In January 2021, something unusual occurred on the United States Stock Market.
Millions of retail investors started buying shares in GameStop, causing share prices to surge from US$20 to US$500 in a few short weeks.
It was not nostalgia that drove people to invest in this flagging chain of video game stores.
Rather, the action - coordinated on the Reddit forum r/wallstreetbets - was targeted at securities with large short positions held by institutional investors.
Hedge funds who bet against GameStop lost billions of dollars, while small-time investors profited.
It’s no wonder the saga is now the subject of a new film, Dumb Money, hitting cinemas across Australia today. But there’s more to the story than initially meets the eye.
While some retail investors made huge gains, others who jumped on the bandwagon too late and bought at the top of the market lost thousands of dollars. Their fear of missing out made them lose out in a big way.
That’s why before each screening of Dumb Money you’ll see an advertisement from ASIC, calling on investors not to believe the hype and to invest in the facts.
As the financial services and markets regulator, ASIC’s job is to drive good consumer and investor outcomes and promote market integrity.
Since the COVID-19 pandemic, the investment landscape has shifted. In the year leading up to the GameStop short squeeze, around 400,000 new investors - predominantly millennials - placed their first trade on the Australian share market.
Our research shows two in five investors are sourcing investing information from social media and networking platforms. Over half surveyed admitted they have invested because they didn’t want to miss out.
It’s great that young Australians are getting involved in the market and taking control of their financial future. They will continue to play a key role as the investment landscape evolves.
However, as the GameStop short squeeze shows, following the crowd can leave you short-changed.
At the same time as these events were occurring in the United States, an Australian-listed small cap mining company GME Resources saw a price surge as around 1000 Australian investors tried to get in on the hype. As it had the same ticker as GameStop (GME), they did not realise they were buying the wrong company.
We have seen how social media can be used to promote misleading information that can inflate share prices and place investors at risk. There can be immense pressure to rush into an investment when it is pitched as a once-in-a-lifetime opportunity with guaranteed returns.
The reality is that nothing in life is guaranteed, and every investment incurs some level of risk.
We know information and advice on social media forums such as Reddit, Facebook and LinkedIn may be conflicted. Some companies and product issuers pay promoters to post favourable comments to encourage first-time traders to invest.
That’s why we urge consumers to understand the impact hype can have on investment decisions and carry out careful research if tempted by an opportunity they find online.
Smart investors plan, research and understand their investments. They work out how they fit with their financial goals. They don’t get sucked into the spin or the frenzy.
Before you choose an investment, it’s important to understand what you’re trading in. The reality is if it sounds too good to be true, it probably is.
Be aware that free online trading platforms can offer different types of investments including some that are complex and risky. Speculative stocks, by their very nature, are a high-risk, high-reward stock with uncertain prospects. There are no safe bets.
ASIC will never hesitate to take action where we see a risk of material harm. We are keeping a close eye on social media driven stock-ramming and ‘pump and dump’ schemes, as well as low-cost apps that seek to ‘gamify’ share trading.
But we also encourage investors to be smart. Don’t make rash decisions based on a fear of missing out on market falls or gains - otherwise you might get caught out.
ASIC is Australia’s corporate, markets and financial services regulator. Go to Moneysmart to learn the golden rules of investing.
This article was first published in Livewire Markets, on 26 October 2023.
