Skip to Content

Following GameStop Stock Rally, SEC Issues Warning About Investing Based on Trends

February 17, 2021 Blog

Even if you don’t closely follow the stock market, you almost certainly heard about the Reddit-fueled GameStop stock rally in January 2021. After trading well under $20 per share throughout 2020, the company’s share price spiked to nearly $350 before settling back down in the $40 range (before rallying again in late February).

In the wake of the GameStop rally, the U.S. Securities and Exchange Commission (SEC) issued an Investor Alert titled, “Thinking About Investing in the Latest Hot Stock?” In the Investor Alert, the SEC warns against buzz-fueled investing and cautions against other high-risk trading strategies that can lead to losses for individual investors. Here, securities fraud lawyer Jake Zamansky reviews the SEC’s recommendations and provides some additional tips for avoiding substantial investment losses.

5 Common Investment Mistakes That Lead to Losses for Individual Investors

The SEC’s Investor Alert highlights the risk of investing based on trends, and it discusses common mistakes that can lead to investment losses. These mistakes include:

1. Investing in “Bubbles or Manias”

The GameStop stock rally had all of the hallmarks of an investing “bubble” or “mania.” As the SEC notes, these events are usually followed by a contraction or “panic,” which involves, “wide-scale selling of the investment that causes a sharp decline in the investment’s price.”

2. “Momentum Investing”

“Momentum investing” essentially involves seeking to ride the wave of an existing market trend. Investors who believe they can capture some of the profit from a bubble or mania (or who have a fear of missing out) will invest after a stock has already begun to rise in value. But, when the inevitable panic follows, they will often be faced with selling their investment for a loss.

3. “Noise Trading”

The SEC defines “noise trading” as purchasing a stock based on media coverage rather than research and due diligence. When investing, it is imperative to make informed decisions based on comprehensive and reliable information, and media outlets often only cover part of the story.

4. Investing on Margin

Recently, many inexperienced investors have fallen for investing “on margin.” When you invest on margin, you borrow money to increase the amount of your investment. While this increases your potential returns, it also means that you can end up owing more than you invested.

5. Falling Victim to Market Manipulation and Other Fraudulent Practices

Market manipulation fuels many bubbles, and it is often the impetus for momentum investing and noise trading. The risks of investing in a manipulated market are extremely high, but in many cases, investors will be able to pursue claims for securities fraud. From broker fraud to unsuitable investment advice, various other fraudulent practices also can lead to losses for individual investors. Here too, however, aggrieved investors will often be able to recover their losses through FINRA arbitration or securities litigation.

Contact Securities Fraud Lawyer Jake Zamansky  

Have you suffered significant investment losses in a manipulated market? Are you concerned that you may be a victim of stockbroker or investment advisor fraud? To discuss your situation with securities fraud lawyer Jake Zamansky in confidence, call 212-742-1414 or request a free consultation online now.