How to spot stock ramping on forums and social media
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There is concern among some investors that stocks — and even entire sectors — are easily influenced by social media users trying to ramp or “pump and dump”.
“It’s very much sector-focused at the present time, whereas previously it was very stock-specific,” says resources expert Gavin Wendt.
“Everybody is just talking about lithium and if they’re in a lithium stock all they do is post articles about lithium — and positive ones.
“I don’t recall seeing this level of hype, shall we say, for a long, long time.
Social media services are hard to monitor, which means they can escape monitoring by authorities such as the Australian Securities and Investments Commission (ASIC).
“On things like Twitter I’ve noticed it’s just a free-for-all and there’s no one monitoring it,” Mr Wendt said. “You can say whatever you like about a stock on Twitter.”
ASIC’s policy governing internet discussion sites (IDS) only stipulates that a site can operate without a licence if those posting to the site are not “securities market professionals” and that postings are clearly identified and kept separate from commercial material.
One of the policy’s underlying principles is to promote “market integrity by minimising the risk that IDS may be used for market manipulation, insider trading and other abuses”.
How to spot a pump and dump
Stocks that become pump and dump targets often have a very small market capitalisation, have little interest from investors and are in a sector considered “sexy”.
Stocks will often trade sideways for a long period of time before a sudden spike and subsequent fall in share price occurs in a short period of time.
A significant increase in share price and trading volume will also probably coincide with a significant increase in social media activity related to the stock.
“In many instances these guys aren’t investors,” Mr Wendt noted. “They’re not really investing, what they are doing is they’re punting or they’re speculating or they’re trading.
“They’re not necessarily long-term believers in a company’s story. Their investment horizon isn’t three, four, five or 10 years, their investment horizon is probably three or four weeks or maybe a day if they are a day trader.
“So what they’re trying to do is take advantage of volatility and they’re trying to generate momentum in one particular direction in a stock. We’re seeing it on a particularly significant scale at the present time.”
No long-term pain
The good news is the pumping and dumping of a stock is not likely to hurt its longer term prospects.
“Ultimately the success or failure of a company will be dependent on all of the key fundamentals: project, management, commodity prices, market environment, ability to raise funding, all of those important aspects,” Mr Wendt said.
“A company’s longer term success or failure won’t be dictated by whether the posters on an internet forum are ramping a stock or talking it down.”
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.