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Be wary of temptations of social trading

Ups and downs: "meme stocks“ have experienced wild fluctuations in price

Social trading platforms continue to increase in popularity as Covid-inspired retail (and possibly industry) investors are chatting, collaborating, observing, and mirroring other traders’ strategies about what, how, when, and why investing is powerful, fun (I have reservations about the fun part) and potentially financially successful.

Social trading, referred to as another step in the democratisation of finance, is a whole new investing world – now ten years young, fuelled by a whole new group of investing public participants, some of who were relatively indifferent in the past, while others are beginners learning about the amazing complexity and logistics of the investing world.

Interest is high; how could it not be when some chaser stocks have escalated astronomically in price? We are still hearing (and reading) about Gamestop, AMC Entertainment Holdings Inc (another current favourite) and other "meme“ stocks, the name given to stocks that have seen excessive trading volume from retail investors who have targeted it on social media. In other words, this stock has “gone viral” on social media and has seen its price skyrocket as a result.

Further, some companies’ stocks that were/are targets of socially-focused investors – may have been classified in the past as mundane, leaning towards bankruptcy, or not exactly high-recognition investments. They’ve taken on new life with social trading interest.

Well, there are personal investment losses, too – bringing up the very old Investment warning that past performance of any security is no guarantee that similar success will be attained going forward.

So, before you begin investing – in any type of security, funds, stocks, options, crypto, ETFs, foreign exchange, etc, there are a few serious things you need to think about.

Yep, you know the mantra from yours truly is the same as it has always been.

I know how alluring it is to see the astronomical rise in price of some of these stocks. As the author referenced below, V. Rasiinghani, stated about AMC “you could have invested a tiny amount into this boring company at the start of the year and have enough to buy a car or put a down payment on a house now”.

I will add to that – if you made a profit – on paper – and then cashed out.

Things to think about before parting with your money

1. Can you afford to lose any money, seriously? Your risk of loss rises when investing in a single security (concentration risk).

2. Are your financial affairs in order? Know what your monthly expenses are; set that cash aside for coverage: Mortgage, rent, any other fixed expenses, food, electricity, internet, communications, water, all the necessities.

3. Know exactly what your monthly income is? I know that sounds self-explanatory; however, if you are working on a commission basis and your monthly income fluctuates, this means that you have to be more careful in covering your fixed monthly expenses.

4. What do you have saved for an emergency fund? Post-Covid, I would expect advisers to extend the contingency set-aside amount guideline from six months to a year of living expenses, at least. The point is that when you think about investing, particularly, if you are newbie investor, you don't know what the results will be. Investing is not a guaranteed process. You have to ask yourself, do I need this money for something else?

5. Or again, can I invest it and afford to lose it all?

That sounds pretty abrupt; it is for a reason.

People think because others are making money, so can we. Nothing wrong with that, after all we are humans and the way we react to finances has been a fascinating topic for a very long time. Our human behaviour, particularly towards money tends to be different depending upon the circumstances.

If our investments are going up like a moon trajectory, we are incredibly happy. We tend to be a bit euphoric. And then we think the gains may last for ever – and are emotionally crushed when the value tanks.

When we have made a decent profit, instead of trimming profits, and diversifying, we decide to not only hang in there, but buy more of the same security.

Maybe you'll make even more money – and maybe you won’t.

Here is where we talk about unrealised gains versus realised gains.

There is a tremendous difference.

We know what it is, but we forget when we see those big profits on paper because we feel wealthy. We feel like we can afford other things. But the reality is, we have not locked in the profits. They're just there on your financial statement.

Yes, the profit is real, but when it is not realised, surprises don’t always have happy endings.

Your sceptical question then can be, well, why don’t I just buy and hold?

This is where the earnest conversation about analyses, management and diversification of a portfolio comes into focus.

Investment managers are highly skilled at investment strategies, short and long-term, holding, buying, selling and the risks involved. There is a reason that the pension industry utilises the expertise of these qualified professionals.

Read more on social trading going forward.

A word to the wise as well. While it is touted as one of the new, new ways to invest – there is no substitute for full diversification of all assets, learning about investing independently and making your own decisions.

Financial education is a lifelong process because the context and value of money will continue to evolve in the ever-changing investment world.

Next: Part 2 - Careful investing thoughts include the three-bucket strategy

Sources

The Reality of Investment Risk, https://www.finra.org/investors/learn-to-invest/key-investing-concepts/reality-investment-risk

What Are Meme Stocks and Can They Make You Rich? - Vishesh Raisinghani,

https://ca.finance.yahoo.com/news/meme-stocks-rich-170043638.html

International Banker Social Trading: A Key Tool In The Democratisation Of Finance, https://internationalbanker.com/brokerage/social-trading-a-key-tool-in-the-democratisation-of-finance/

Martha Harris Myron, CPA JSM, a native Bermudian, is the author of The Bermuda Islander Financial Planning Primers, International financial consultant to the Olderhood Group International, and financial columnist to The Royal Gazette. All proceeds from these articles are donated to the Salvation Army, Bermuda. Contact: martha@pondstraddler.com

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Published June 26, 2021 at 8:50 am (Updated June 28, 2021 at 8:08 am)

Be wary of temptations of social trading

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