The Australian Securities and Investments Commission has released a statement directed at retail investors to warn them of “common tactics to get you to invest in shares”.
“Don’t believe the hype”, the regulator advised Australians, while admitting that investing in shares can be a rewarding experience and can help grow wealth.
“However, it involves risk and there are certain people out there employing new and ever-changing techniques to get you to part with your money”, ASIC stated.
“While some of these techniques are not scams as such – because they relate to an actual asset – they are designed to get you to trade more or pay too much without properly considering the risks. Some of the tactics may also be illegal and involve market manipulation”.
ASIC enumerated the most common tactics, some even illegal, to persuade the public to invest in stocks so they can better understand the risks involved and to avoid getting caught up in the hype.
Pump and dump
‘Pump and dump’ is probably the most common of the inappropriate tactics as it is even considered a form of market manipulation, therefore, illegal. “‘This occurs where a promoter buys shares in a company and then starts an organised program of increasing (or ‘pumping up’) the share price. They do this by using social media and online forums to create a sense of excitement in a stock or spread false news about the company’s prospects”, said Warren Day, Chief Operating Officer at ASIC.
“If the promoter is successful in getting the price up, they sell out (or ‘dump’) their shares. They take a profit and other shareholders suffer as the share price collapses as the promoter is no longer trying to pump the price up. If you have bought just before the promoters sells out, you can lose a lot of money very quickly”, Mr. Day added, adding that there are circuit breakers in Australian markets that kick-in when prices see extreme price movements.
‘Protect yourself – don’t believe the hype! Do your research and look at company fundamentals to see if price rises are justified before you invest your money”.
Gamification of trading
Gamification has gained prominence with the rise of Robinhood, the US-based neobroker that is currently under regulatory pressure for its gamification model.
“‘It has never been easier to buy shares. companies are spending lots of money to develop easy to use apps and minimise the number of clicks you need to buy or sell securities”, the ASIC officials continued. “They are also adding in features to get you addicted to their app. Many of these are copied from the gambling industry to get you to invest more and more often. Any many of these are being targeting at young people”.
Celebrity endorsements, ease of access, incentives like free shares, referrals, or free brokerage are some of the moves made by brokers that gamify the experience. Trading apps are also designed to send pings and messages that keep users engaged and trading more than they otherwise would.
“Academic research has shown that the more frequently you trade the more likely you are to mistime the market and lose money. To protect yourself, set limits on how much you want to invest or how often you want to trade. Turn off notifications to reduce the number of messages you receive. If you believe you are addicted, consider contacting gambling help services.”
To better understand the phenomenon, FXOpen Natalia Zakharova’s “The Predicament of Trading Gamification Technology” is a good read. She has previously described the broker’s client onboarding in 2020 with the rise of gamification in a year of pandemic.
Copy trading is mostly targeted at less experienced traders as it facilitates access to profitable trading without much effort from the client. They only need to automatically copy one or more of the platform’s traders.
ASIC advises users to make sure they understand how any investment product works. “Understand what it can invest in, what control you have and how much money you could potentially lose. Set limits and take care.”
ASIC concluded that increased interest and engagement in investing is welcomed, but investors should inform themselves and minimse the risk of having a poor experience.
At the end of the day, investors should not “fall for the promise of high returns” and do proper risk management, from exposure to diversification.