The recent news about stock trading has generated a fair amount of confusion about how easy it is to make money in the stock markets. Individual investors, motivated by social media postings, drove up the prices of stocks in companies such as GameStop, AMC Theatres, and Tootsie Roll. The vast majority of individual investors buying these shares were speculating that they could profit from the rising prices. While there is nothing wrong with buying shares of a company that you believe is underpriced and well positioned for appreciation, many of these purchases followed social media postings, not financial forecasts.
One of the types of social media driven trading was started by a few sharp individuals on the Reddit platform. It is known as a short squeeze. A short squeeze can generate a short-term profit opportunity if those implementing the strategy are able to force other investors to buy the stock at a time when there are only a limited number of shares available to be bought. These factors can contribute to a large spike in the share price. The elevated share price normally lasts only a few days or a week or two at most.
Many of the less-informed investors who bought shares when prices were rapidly rising, did not understand that they would also have to quickly sell the shares in order to profit from the trading. As has been reported recently, many people bought the shares at the elevated prices and were still holding them as the prices crashed back to close to where they had been before the mania began a few weeks ago. It is a good reminder that speculating can be financially perilous and should only be done with a proper understanding of the risks.
Another recent phenomenon of the effects of social media is the stock price increases for companies following tweets about their companies by Elon Musk. As a pioneering billionaire, Musk has a tremendous social media following that tries to profit from following his advice.
Earlier this year, Musk tweeted his fondness for the social media platform Signal. Signal happens to be an independent nonprofit social media platform. It is a private company that is not investible by the public. Even though the company is not investible, the share price of SIGL (Signal Advance), which has nothing to do with the social media platform Signal, rose over 5,000% in the three days following the tweet. Signal Advance had no revenue from 2014-2016 and has not filed any reports with the Securities and Exchange Commission since 2019. Those facts did not seem to be relevant to the massive number of uninformed traders who were hoping to profit by following Elon Musk’s advice. Even a minimal amount of due diligence on the company whose stock they were buying would have identified the mistake they were all making.
More recently, Musk’s comments have sent the prices of other securities flying, leading the Securities and Exchange Commission to consider investigating his messaging. In prior years, his tweets about Tesla, the company he founded and leads, generated significant fines for violating public disclosure rules for publicly traded companies. While he clearly delights in seeing the spectacular effects his comments can generate, it is not clear if those who are purchasing securities based on his comments understand that they are speculating and not investing.
Unlike speculative trading, investing is the process of accepting an amount of market risk in exchange for the expected returns from holding the investments.
Oak Wealth Advisors does investing. We align our clients’ portfolios with their goals. We then apply discipline to the process of managing the portfolios to ensure that the level of risk remains appropriate over time. Speculative trading in social media threads will never be part of our investment approach.