1 September 2021

Investing in shares can be a rewarding experience and can help you grow your wealth. However, it involves risk and there are certain people out there employing new and ever changing techniques to get you to part with your money.

While some of these techniques are not scams as such - because they relate to an actual asset - they are designed to get you to trade more or pay too much without properly considering the risks. Some of the tactics may also be illegal and involve market manipulation.

ASIC’s Warren Day recently joined ABC Melbourne Drive, in his regular segment, to discuss some of these tactics to help people better understand the risks involved and to avoid getting caught up in the hype.

‘Pump and dump’

‘This occurs where a promoter buys shares in a company and then starts an organised program of increasing (or ‘pumping up’) the share price. 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. This is a form of market manipulation and is illegal,  Day says.

‘If the promoter is successful in getting the price up, they sell out (or ‘dump’) their shares. They take a profit and other shareholders suffer as the share price collapses as the promoter is no longer trying to pump the price up.

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

‘ASIC monitors the market for this activity and there are circuit breakers that kick-in when prices see extreme price movements.

‘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’, Day says.

Gamification of trading

‘It has never been easier to buy shares’, Day says. ‘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.

‘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. Any many of these are being targeting at young people.

‘Techniques include celebrity endorsements, ease of access, offering incentives like free shares or refer a friend benefits or offering free brokerage. Apps are being designed to keep sending you messages or pings to keep you engaged or trigger you to invest. This may result in you trading more than you may otherwise like to and paying too much to buy shares.

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

‘To protect yourself, set limits on how much you want to invest or how often you want to trade. Turn off notifications to reduce the number of messages you receive. If you believe you are addicted, consider contacting gambling help services’, Day says.

Copy trading

Another product being marketed to less experienced investors is copy trading.

Copy trading is marketed on the basis that you don’t have to worry if you have limited knowledge about investing – just copy one of the provider’s traders.

Under this arrangement, you automatically copy someone else and can lose control of what you are investing in. Your money may be going into high risk products where the risk of loss is high.

‘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’, Day says.

Investing safely

‘While ASIC welcomes the increased interest and engagement in investing, we want investors to inform themselves and minimse the risk of having a poor experience.

‘Don’t fall for the promise of high returns - understand what you are buying, do some checks and consider the risks.

Think about setting some limits on how much you invest and consider a diversification to help spread risk.

Visit ASIC’s Moneysmart website for more information on how to buy and sell shares and invest safely.