The SEC Office of Investor Education and Advocacy ("OIEA") alerted investors to the substantial risks associated with social media-based short-term investing, particularly in volatile markets.
OIEA cautioned investors on:
- investment bubbles or manias, which involve the rapid rise of a stock's price, as such investments are typically followed by a contraction in the stock's price;
- momentum investing, which is a strategy that relies on the continuance of existing trends in the market;
- noise trading, which occurs without the use of economic, financial or other quantitative or qualitative data that may impact the value of an investment;
- investments with margin, options or short sales, as such investments have magnified risks, including the loss of more money than what was initially invested; and
- potential stock price manipulation on online platforms.
With regard to long-term investment, OIEA suggested that investors (i) understand their time horizon for investing and consider investment diversification and asset allocation, (ii) establish and maintain a financial plan, (iii) be wary of investing solely based on information found on social media and (iv) research companies thoroughly before making a decision to invest.
This is sound investment advice, but it cannot compete with the likes of subreddit WallStreetBets. If the SEC wants to reach the social media audience, it is going to have to transform its game.
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