Elon Musk, the chief executive office of TESLA has been reported by media outlets as touting Dogecoin, a cryptocurrency. In February, the Daily Mail reported that after Musk had been “tweeting relentlessly” promoting Dogecoin, the cryptocurrency jumped 21 percent in just 24 hours.1 On May 24, 2021, The Street reported that “Bitcoin shot up to more than $39,500 within minutes of Musk tweeting that he was having active discussions regarding the sustainability of the cryptocurrency.”2
These examples illustrate the power of social media to influence investing. Both the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) have issued alerts to help investors evaluate and make more informed decision on their investments which are influenced by social media.
The SEC alert sums the situation up best, reminding retail investors that all investments have risk, but short-term investing in a volatile market carries significant risk.3 The SEC warns of the significant investment losses which can result from buying individual stock in heavily promoted companies with smaller market capitalizations which investors have read about though social media, news, aggregators, investment research websites, online investment newsletters, rating websites, message boards, chat rooms and discussion forums.
The SEC alert referenced a Library of Congress report which identified several investing behaviors which should be considered and addressed before investing in a volatile market.4
One of the most common identified behaviors is investing in bubbles or manias which capitalize on “collective enthusiasm or exuberance regarding the investment’s prospects” which can result in significant investment losses when a contraction or panic occurs which triggers widespread selling and a decline in the investment’s price. Another identified behavior which can lead to significant losses for investors is momentum investing, or “capitalizing on the continuance of existing market trends.” A third behavior is noise trading which is buying or selling an investment without reviewing fundamental data that can affect the value of the investment.
In all, the Library of Congress Report identified and described six additional behaviors which can result in significant investment losses including Active Trading, Disposition Effect, Focusing on Past Performance of Mutual Funds and Ignoring Fees, Familiarity Bias, Naive Diversification and Inadequate Diversification.
FINRA’s social media investor alert provides 10 tips to consider when making investment decisions as well as providing resources to learn more about many of the tips mentioned.5
An overview of these tips includes:
1. Consider the source of your information, as real-time discussion platforms and buy/sell indicators driven by social sentiment can lead to emotionally-driven or impulsive investment decisions.
2. Understand the rules and requirements of day trading, particularly if you are using leveraged investment strategies or trading leveraged products.
3. Be knowledgeable about margin investing, as a firm can force the sale of securities in your accounts to meet margin calls or increase its margin requirements without contacting you.
4. Understand the implications of a short-term trading halts and longer-term trading suspensions.
5. Don’t venture into options trading until you understand its unique processes and vocabulary.
6. Understand that markets are volatile and don’t allow your emotions to lead you into a rash investment decision that derails a long-term investment strategy.
7. Before investing ask yourself three things. 1) Does this investment align with your financial goals? 2) Are you comfortable with the level of risk? 3) Can you afford to lose money on your investment?
8. Don’t fund investments using long-term assets (e.g. early withdrawals from your retirement account or a second mortgage on your home).
9. Always diversify your investments to better manage risks.
10. Report misconduct by investment professionals to FINRA or the SEC.
Investing your hard-earned money can help grow your nest egg, but investing without knowledge of investing principles and the risks involved can result in significant financial loss and hardship. Both the SEC and FINRA focus on investor education to help investors, especially those new to investing, make informed decisions. Even when you are working with an investment professional it is wise to take advantage of investor education to aid in making investment decisions.
Call our Securities Law Firm in Detroit if you have questions or concerns about your investments or your broker’s management of your account. Our Securities Attorneys have the experience and knowledge to protect your rights as an investor and recover losses due to investment fraud and negligent practices. We have successfully represented hundreds of investors in stockbroker mediation, arbitration, and litigation claims. Call today.
___________________________
1 Elon Musk says Dogecoin is ‘Literally’ Going to the Moon, Keith Griffith for Dailymail.com, 2/24/2021
Link: https://www.msn.com/en-us/news/technology/elon-musk-says-dogecoin-is-literally-going-to-the-moon/
2 Video Timeline: Elon Musk’s Impact on Bitcoin, Dogecoin, Cryptocurrency, by Zach Faulds, 5/19/2021
Link: https://www.thestreet.com/video/elon-musk-cryptocurrency-timeline
3 Thinking About Investing in the Latest Hot Stock?: Understand the Significant Risks of Short-Term Trading Based on Social Media, 1/30/2021
Link: https://www.sec.gov/oiea/investor-alerts-and-bulletins/risks-short-term-trading-based-social-media-investor-alert
4 Library of Congress Report: Behavioral Patterns of U.S. Investors
Link: https://www.sec.gov/investor/tools/behaviorialpatterns.htm
5 Following the Crowd: Investing and Social Media, 1/29/2021
Link: https://www.finra.org/investors/alerts/following-crowd-investing-and-social-media