“Investomania”: What the SEC Wants Investors to Know About Risky Investments
The SEC has debuted an educational campaign targeted at new investors. The “Investomania” ads highlight Investor.gov, a free resource from the SEC that provides basic investing guidance. “Sometimes investing may look and feel like a game,” the site reads. “Our ‘Investomania’ public service campaign uses a game show concept to educate investors, in a playful way, that investing is not a game…”
The campaign has earned the ire of “meme stock” investors, some of whom found the tone of the campaign patronizing. Despite the criticism, the campaign does feature valuable takeaways.
High-Risk Investments and Investing Strategies
The Jeopardy-style board displays a selection of risky investment products and strategies:
1. Stocks on Margin
2. Stock Tips from Your Uncle
3. Crypto to the Moon
4. Meme Stocks
5. Celebrity Endorsements
6. Tulip Bulbs
7. Timing the Market
8. FOMO
9. Guaranteed Returns
Keep reading to learn more about each of these hot button investing topics.
1. Stocks on Margin
In one segment, a contestant announces, “I’ll buy stocks on margin. Sure sounds fancy!” After the buzzer sounds, the voiceover chimes in: “Investing is not a game. Borrowing to invest can be very risky.”
A margin account allows an investor to buy shares with money borrowed from the brokerage firm. Borrowed money is called “leverage,” and it amplifies the risk for losses. Investors should also be aware of “margin calls.” If the value of the securities in the account falls below a certain amount, an investor must deposit more money into the account or risk having the brokerage liquidate other securities in order to meet the account minimum.
Margin accounts also come with interest rates and broker fees, which increase the likelihood that the investor will lose money.
2. Stock Tips from Your Uncle
Stock picking is always risky. Everyday investors — even savvy investors who have had success in the past — are probably not in a position to make projections about the future prices of stocks. A low-risk, low-fee, diversified portfolio is statistically more likely to produce beneficial returns than a single stock or an array of hand-picked stocks.
3. Crypto to the Moon
Cryptocurrencies have generated buzz among retail investors who are attracted to the idea of decentralized finance. But investors beware: This part of the market is not yet well regulated, making it a rich breeding ground for scams. If your cryptocurrency is lost or stolen, or if the developers “rug pull” and abscond with your money, there may not be a reliable legal recourse for recovering your investment.
4. Meme Stocks
Crypto currencies and tokens have reaped the benefits of meme-ification. After a crypto token called “Dogecoin” became the subject of popular memes on Reddit, its price began to skyrocket, rallying its supporters with the motto, “To the moon.” Subsequently, the price of Dogecoin crashed.
Online enthusiasm should not be mistaken for genuine potential.
5. Celebrity Endorsements
In one of the “Investomania” clips, an actor tells the audience, “You should buy crypto. Trust me — I’m an actor.” Celebrity endorsements of specific stocks or cryptocurrencies should always be met with skepticism.
An unfortunate number of celebrities have been involved in “pump and dump schemes.” In these schemes, the celebrity or social media influencer encourages their large fan base to purchase shares of certain stocks. This influx of investor interest drives up the share price, only for the celebrity to sell their shares, pocketing enormous profit. Meanwhile, their duped fans are left with worthless stocks, crypto, or NFTs.
6. Tulip Bulbs
In the 17th century, tulips were considered a status symbol, and buyers were eager to pay premium prices. The Dutch securities market quickly introduced futures — contracts that allowed investors to buy the rights to purchase a commodity at a certain price at some point in the future. Starting in 1634, tulip prices began to dramatically increase. By 1637, the market crashed, for reasons that historians still debate. “Tulipmania” is considered one of the earliest examples of a speculative bubble.
7. Timing the Market
Timing the market involves moving assets based on market projections. Day traders have access to market research or other economic data that informs their next move. This is a risky strategy, especially for people who are new to investing. Markets are unpredictable and are affected by unforeseeable events. Timing the market also requires a commitment to monitoring investments on a daily, or even hourly, basis. Investors who do not want to take on substantial risk should steer clear of this strategy.
8. FOMO
When a new investing trend hits the market, investors may be more susceptible to scams due to “FOMO” a.k.a. the “Fear of Missing Out.” With stories of millionaires made overnight via options trading or Bitcoin, everyday investors might worry that they are going to miss out on the next big thing. Scammers and unscrupulous brokers use this anxiety to their advantage.
Substantial data suggests that investors who do not want to lose money are better off sticking with low-risk investments that promise modest (but consistent) returns.
9. Guaranteed Returns
There is no such thing as a guaranteed return on a security. Every type of investment comes with some degree of risk. If a broker or a financial advisor tells you otherwise, steer clear. Financial professionals may be motivated to make unfounded promises when they stand to earn a hefty commission.
What Steps Should I Take Next?
If you are new to investing, make sure to research any brokerage firm, advisory firm, and financial professional whose services you are considering. You can use resources like BrokerCheck.org and Investment Adviser Public Disclosure. You can also browse their names on our blog dedicated to broker fraud and misconduct.
New investors should also familiarize themselves with high-risk investments and signs of securities fraud. Fraud is rampant in the securities industry and investors should arm themselves with knowledge before opening a portfolio.
