I’m not much of a gamer, although I know many who are quite addicted to video games. From what I understand, the objective of such games is to outscore an opponent or outscore your previous score.
Recently you may have heard of stocks that took a rapid rise, followed by a rapid decline. This was in large part due to applications that are part social media and part investment platform. It basically begins like this: someone chats about a publicly traded company. As others join in, more information (not always substantiated) is spread via chat rooms. Those anxious to strike-it-rich use online trading apps to buy or sell the stock du jour. The tricky part is separating fact from fiction, and one must also hope the biggest fool is not them.
New Speeds to an Old Game
These investing games are not new but instead have new technologies applied that allow stocks to move up or down with great volatility and speed. Like video games, the objective is to score points. In this case, the points are money: real money. The flip side to this game is that participants can also lose money.
Proponents of this type of trading contend that such platforms allow the small investor to keep up with sophisticated professional investors. Not everyone agrees, including the Securities and Exchange Commission, some state regulators, and more recently, the House Committee on Financial Services.
Like most innovations, there will be abuses that likely will bring about regulations. Protecting people from others who are taking advantage of them is challenging. Protecting people from themselves is nearly impossible.
I’m not trying to discourage online investing. However, I do caution against active trading when the only way to make money is IF the momentum continues far and long enough to profit.
Hearing Regulation
There are positive aspects to these investing applications. The apps increase the interest of younger investors who may have previously had no interest. Also, some apps offer educational tools to help new investors. For new investors, some apps are very easy to use, encouraging the average person to feel competent enough to invest. Although the average person can now invest easily on these apps, they fail to have some of the most helpful data easily accessible. Much of the clutter is removed to make these apps user-friendly, but the clutter often contains valuable information for the long-term investor.
It is only the recent extreme volatility that has left some users playing a very dangerous game. If you watched any of the hearing by the House Committee on Financial Services, you have some idea of what I’m talking about. The hearings were to address one stock in particular: GameStop.
Throughout the hearings, some corporate officers found themselves in the hot seat with congressional members. The normal trapping questions and the “YES or NO?” demands aside, the hearings effectively showed there may well be a need for regulation within investing applications for the common investor.
Modern Investing or Financial Gambling?
One corporate officer even said, “investing is investing it’s not gambling”. I certainly agree with the statement, although I’m not sure the actions of some involved exemplified this. Objectively, I believe making investing more available is a good thing, but only when investors are fully aware of risks. To put it simply, it is not good to invest just because one can access an app on their smart phone.
As an experienced investor and financial planner, make sure you fully understand not only what you are investing in but also how you are doing it.
March 2021
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.Investing involves risk including loss of principal.
