SEC Issues Investor Alert With Social Media Stock Warnings

Social media has become an integral part of modern culture. It’s the place where we can keep in touch with friends, relatives, and people you met long ago. You can meet people with shared interests, learn new things, swap stories, and ask for advice. Facebook, LinkedIn, and other similar sites have group functions for like-minded people to gather to share and discuss.

Silver Law Group’s managing partner, Scott Silver, is a frequent news commentator speaking about current events relating to investing. Scott appeared in multiple news outlets including CNBC discussing the trading around Gamestop and the perceived relationship between wall street v main street.

Just like “reality TV” and those gossip magazines at the grocery checkout, not everything on social media is what it seems. Psychology offers many answers as to why so many people believe everything they see and read without asking questions.

For instance, “influencers” are those who post frequently about their life and lifestyle, and frequently receive paid sponsorships and other compensation in return. However, not all of these “influencers” are telling the truth about their lives, and taking pictures for social media that aren’t completely accurate.

Researching financial related information can be just as inaccurate no matter where it’s found. That’s why it’s important to have a strong understanding about any securities purchases you’re considering, as well as reliable sources before making any decision. This includes anything from your stockbroker and/or financial advisor.

If you’re just a casual investor who doesn’t have the experience of a more sophisticated investor, you’re taking a gamble with the risk of losing not only your investment capital, but more.

The Securities And Exchange Commission recently published an investor alert discussing stock information on social media. Keep this in mind when researching stocks, securities, or other financial information.

GameStop On Reddit

The recent surprise increase in Gamestop stocks came from a discussion group called “WallStreetBets” on the social media news and discussion site Reddit.

The video-game store has been hit hard by COVID-19, and was struggling to survive. Several hedge-fund managers had bet on Gamestop, AMC Theaters, Blackberry, and other companies that the price would continue to fall. This would allow them to borrow at a high price and resell it at a lower price, making a profit.

Securities fraud attorney Scott Silver commented that “the recent activity in GameStop highlights the use of chatrooms, message boards and other communications to let retail investors communicate.  However, investors don’t know who is truly behind many screen names”.

GameStop’s stock price bottomed out at $2.57 in 2020, then rose back up to $18.84 per share. At that point, one hedge fund company decided to get involved and backed the company. While the price rose, other hedge fund companies began short-selling the store’s shares in an effort to short-sell. This caused the price to inch up further.

For the investor who borrowed the stocks at $2.57 each, selling them at $18.84 would net them a profit.

But in GameStop’s case, amateur investor members of the group WallStreetBets decided to begin buying the stock at its low price, driving the price upwards. Members were encouraged by some of the members to start buying them as a retaliatory move against the hedge funds that were betting on the store’s demise.

Their purchases caused the stock price to continue rising, and got the interest of other funds interested in making money on the increase. This process is called a “short squeeze,” and can cause unlimited losses.

Knowing that the increasing price would cause the short-sellers to lose money, several group members encouraged everyone to start buying GameStop.

On January 27, 2021, GameStop’s shares were selling at $350 per share.

Investment Losses

For someone who bought GameStop low and sold it at the high price, this was a big win. Many amateur investors were able to cash in on the sudden interest. But in reverse, it’s entirely different.

The short-seller who borrowed the shares at $18.84 earlier in the year and sold them at that price will have to borrow the difference to return the stocks to the owner. That’s in excess of $300 per share leading to considerable loss on the part of the short-seller.

This means that any hedge fund involved with short selling GameStop has lost anywhere from thousands to millions of dollars when the price increased.

Citron Research, a company who lost heavily in the GameStop matter, has decided to focus more on long-term investments rather than betting against companies that may fail.

Securities Class Actions to Recover Stock Losses

In direct response to the GameStop situation, the SEC released an investor alert with warnings regarding stocks, short selling, and social media. This was the situation with GameStop, when a large group of investors urged to buy the shares, sending the price skyrocketing.

Buying stocks or other investments from social media recommendations is frequently not based on solid information. Fraudsters frequently use social media to manipulate markets, inflate (or deflate) the price of securities, and spread incorrect information about an investment or a company.

Information travels fast on social media, and not all of it is accurate. Short sales, margins and other options can bring a high degree of risk and potential for loss. This is why it’s important to not only understand the investment you’re considering, but the risks involved as well.

There is a wealth of information available online and on social media that may be useful in researching an investment. However, the SEC recommends extreme caution when relying on information solely on social media for investment information, especially with a market that’s volatile. Seek out the company’s website, its investor relation information, as well as industry trade information.

And of course, never feel pressured to invest right away, even if it’s from your investment advisor. It’s important to research any potential investment before giving anyone money for it.

Over three dozen class actions have now been filed against Robinhood and other discount brokerage firms and others blaming them for, amongst other issues, changing the rules of the game midstream.  Investors are left angry because of damages suffered when trades could not be executed.

Silver Law Group Helps Investors

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today and let us know how we can help.