The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.
Social media has played a significant role in the way retail traders have behaved over the past year. Sites such as Twitter Inc TWTR and Reddit have essentially become information hubs for retail traders to share trade ideas and where novices turn to learn more about the market.
We have seen this with market events such as the one that propelled the GameStop Corp. GME frenzy, in which retail traders from the Reddit chatroom “wallstreetbets” targeted the stock due to its high degree of short interest and caused it to climb more than 1000% in just two weeks. A similar story played out recently with cannabis company Sundial Growers SNDL, whose stock rose over 200% in the span of a week following a spate of targeted buying from the online crowd.
And while social media can be a great place for new traders to familiarize themselves with the market, some experts believe there is still a need for additional education.
Benzinga had the opportunity to speak with Bryan Sapp, senior market strategist at Schaeffer’s Investment Research to talk about some of the implications of social media’s influence on the new generation of traders and the importance of education in order to make informed investment decisions.
Don’t Confuse Brains With A Bull Market
Margin debt, which refers to the amount of money an investor borrows from their broker to invest in financial instruments, has climbed to new all-time highs in recent months.
Given the rising rates of margin debt, Sapp noted that his biggest fear for retail traders is the amount of leverage they are using with margins and options. He went on to say that leverage is great when traders are correct on their particular market stance or stock, but they should remember that this leverage is a two-way street.
“Investing is not about how much money you make when things are going well, but how much capital you preserve when things are going badly,” said Sapp. “Risk appetite is usually highest near significant market tops, and this data should warrant caution moving forward.”
At the end of January, margin debt reached nearly $800 billion. And while margin debt has been increasing for some time now, the recent rate of its rise has been the most dramatic recorded in history. The only two periods that rival this recent rise were in the late ’90s and during 2007-2008, both of which were right ahead of huge market selloffs.
While many retail investors have experienced significant gains over the past year and have become emboldened by their performance, Sapp argued that traders should “not confuse brains with a bull market” — an old wall street adage that tells traders to not confuse skill with a rising market.
The Need For Education
Looking at the rising margin debt and increase in investor confidence, Sapp believes that it is imperative that new traders continue to learn more about the instruments they’re trading and not rely solely on the actions of an internet mob.
“Longevity in all market environments is what makes a good trader,” he said.
Sapp highlighted some of the tools offered by Schaeffer’s Investment Research that can offer new traders better insight into the inner workings of the market, such as Schaeffer’s Volatility Index and Volatility Scorecard, which help illustrate when it is best to undertake equity risk or instead pay premium for an options contract.
And for new traders who are new to options, the company also offers self-study courses that explain how derivatives work and when they are best implemented.
While online trends come and go, it is likely that the current social media-fueled craze and the deluge of new traders it has brought to the market will continue to impact the physics on Wall Street for months if not years to come.
As such, Sapp believes new traders may want to look toward additional education resources to avoid significant losses in the heat of a trading fad.
“The best advice I could give new traders is don’t chase stocks that are the ‘shiny new objects’ in this environment. These are generally companies that have had no material changes in their business prospects, but suddenly everyone wants in. Novice traders are generally late to buy these hot names out of FOMO, and once these things reverse, the drops can be dramatic,” Sapp said. “Focus on finding setups that everyone else isn’t already looking at, as the risk in those names can be dangerous.”
The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.
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