Amateur traders should be careful diving into a quickly changing 'stockmarket war' such as the GameStop phenomena, without fully researching what they're getting into, the NZ Shareholders Association says.
A GameStop store in Miami, US. Photo: CC BY 2/ Phillip Pessar
The US stockmarket and institutional investment firms have been reeling from a wave of interest from armchair traders, who have bid up the prices of US companies, including GameStop (GME), Blackberry and Nokia.
Association chief executive Oliver Mander says New Zealanders trading via apps like Sharesies should look before they leap.
"It may feel really good to be able to sock it to all the institutional investors, but actually it's still really important for vigilant investors to know what you're buying.
"Ultimately, if the price that you're paying for the shares doesn't reflect the value of the sum of the parts put together, you will lose out."
The movement began when Reddit social media forum users began to highlight stocks being heavily 'shorted' by larger Wall Street hedge funds.
Shorting is an investment tactic where a large investor can pay a fee to borrow shares it thinks will decrease in value, then sell them with the intention to buy them back once they are cheaper and pocket the price difference, before returning the borrowed shares to the owner. However, if the shares increase in value the firm that borrowed and sold them still has to purchase them back to return to the original owner, and will make a loss.
Reddit users recognised the shorting tactic in play with the GameStop stock, and others, which fuelled a swarm of amateur investment that drove the prices up - leaving the companies that had been shorting the stocks exposed to potentially huge losses.
Mander told RNZ that while it was tempting to follow suit, if the share price was inflated to extreme levels then shareholders were likely to lose money.
Previously he has advised that investors shouldn't rely solely on information from social media, but instead should have a portfolio strategy. And warned that 'gaming' the market - aiming to make short term gains in a volatile market, was essentially "gambling".
NZ online investment firm Sharesies issued a warning to users on its website, due to the high interest in GameStop and other stocks.
"Please, make sure you do your research before investing, and think about how these investments fit in with your long-term investing strategy.
"We believe that everyone should have access to investing. [But] investing involves risk. You aren't guaranteed to make money, and you might lose the money you start with."
Yesterday on Twitter, cryptocurrency firm founder Justin Sun indicated his support for the GameStop stocks and promoted his own cryptocurrency, TRON.
But, Tauranga trader Sam Fisher said instead the share price spiked for Tanzanian Gold - which has the same stock market abbreviation as TRON; TRX.
Fisher said traders appeared to be getting caught up the in hype without being fully aware of where they were putting their money.
"You could see quite clearly people jumping on the bandwagon - didn't even realise that TRX was a cryptocurrency, not a stock, and so they went to the stockmarket, typed in TRX and bought whatever it was purely out of ignorance.
"What you're seeing is hype and ignorance, all together."