‘Don’t believe the hype’: ASIC warns of risks for new market participants

By Michael Karpathios

September 03 2021
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ASIC has expressed concern that inexperienced or uninformed investors are putting their capital at unnecessary risk when tempted into the market by questionable marketing strategies from market promoters.

‘Don’t believe the hype’: ASIC warns of risks for new market participants

In an interview with ABC Melbourne Drive, ASIC COO Warren Day revealed how these strategies are designed to part investors with their money, without giving enough consideration to risks involved.

Mr Day said that these strategies were particularly targeted at young investors or those getting into the market for the first time, encouraged by promises of making high returns.

The first strategy he detailed was “pumping and dumping”, which is an illegal market practice.

“This occurs where a promoter buys shares in a company and then starts an organised program of increasing (or ‘pumping up’) the share price,” Mr Day said.

“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.

“If you have bought just before the promoters sells out, you can lose a lot of money very quickly.”

Earlier this year, ASIC reported they had received an increased number of reports from consumers who lost money investing in the market after responding to fake news articles.

According to Mr Day, the best way an investor can protect themselves from such scams is to do adequate, independent research on any company one may invest in.

“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,” he said.

Mr Day noted there were legal practices of concern as well. One such strategy was the “gamification” of trading, designed to get people trading more frequently and with less thought.

“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,” he said.

“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.

“Academic research has shown that the more frequently you trade, the more likely you are to mistime the market and lose money.”

Macquarie University’s Dr Rowan Tulloch previously spoke with nestegg on this phenomenon, arguing that it can be a net positive for investors if implemented correctly.

“Gamified finance apps can be beneficial for investors. Done well, it is about effectively giving investors information about what is happening in the sharemarket in an easily understood and followed way,” he said.

“The risk of gamified investment apps is that the immediacy they offer means that investors will not always be as diligent in their research into the companies they are investing in.”

To avoid these risks, Mr Day said that investors should set their own limits on how much they want to trade, based on their own personal circumstances. He implored anyone who thought they may be addicted to get professional help.

“To protect yourself, set limits on how much you want to invest or how often you want to trade,” he continued.

“Turn off notifications to reduce the number of messages you receive. If you believe you are addicted, consider contacting gambling help services.”

Mr Day also expressed concern about “copy trading”, a practice that allows investors to mimic the trades of more experienced investors.

By doing this, an investor loses control of what they are investing in. Money may be going into products with a higher risk threshold than than the investor may be prepared for.

Again, Mr Day said investors should inform themselves on the products their money is going into.

He said: “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.”

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