Beware of share market hype – regulator warns

Steer clear of these common tactics putting your money at risk – and tell the kids and grandkids.

Image source: Money Magazine

Key Points

  • Australian Securities and Investments Commission (ASIC) warns individuals to be informed and careful when trading in shares
  • Current share hype can ‘suck’ people into taking uninformed risk
  • ASIC lists risky tactics

Investing in shares can be a rewarding experience that can help you to grow your wealth – but it is not without risk. With shady new techniques being used to get you to part with your money, it’s important to stay savvy when investing in stocks.

That’s the clear warning from Australia’s financial watchdog, the Australian Securities and Investments Commission (ASIC) in a blog on its website to anyone considering taking risks investing in a surprisingly vibrant – perhaps too vibrant – share market.

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’s Warren Day recently joined ABC Melbourne Drive, in his regular segment, to discuss some of these tactics to help people better understand the risks involved and to avoid getting caught up in the hype.

‘Pump and dump’ – social media hype

One way individuals can be tricked into paying too much for stocks is when a share price is artificially inflated through the spreading of misinformation online – which is known as ‘pump and dump’.

“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. This is a form of market manipulation and is illegal,” Mr Day said.

“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.

“ASIC monitors the market for this activity and there are circuit breakers that kick-in when prices see extreme price movements," said Mr Day. 

Even though there are measures in place to help prevent this kind of activity from happening, Mr Day said it still pays to be smart.

“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

It has never been easier to buy shares – but many companies are leveraging techniques from the gambling industry to make their apps addictive to get you to invest more and more often.

With techniques including celebrity endorsements, minimising the number of clicks required to buy or sell securities, incentives like free shares or brokerage, or ‘refer a friend’ benefits, these apps are designed to keep sending you messages or pings to keep you engaged or trigger you to invest. This may result in you trading more than you may otherwise like to and paying too much to buy shares.

Mr Day said 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”, Mr Day said.

Copy trading

A product that can often be appealing to less experienced investors is copy trading.

Copy trading is marketed on the basis that you don’t have to worry if you have limited knowledge about investing – just copy one of the provider’s traders.

Under this arrangement, you automatically copy someone else – losing control of what you are investing in. Your money may be going into high-risk products where the potential for loss is far greater.

“Make sure you understand how any product you are investing in works. Understand what it can invest in, what control you have and how much money you could potentially lose. Set limits and take care”, Mr Day said.

Investing safely

ASIC said it welcomes the increased interest and engagement in investing, but want investors to inform themselves and minimise the risk of having a poor experience.

“Don’t fall for the promise of high returns - understand what you are buying, do some checks and consider the risks.

“Think about setting some limits on how much you invest and consider a diversification to help spread risk," Mr Day said. 

Visit ASIC’s Moneysmart website for more information on how to buy and sell shares, and invest safely.

Source: ASIC