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According to new data compiled by European trading and investing platform Capital.com, relying on Reddit’s popular online investment forum, WallStreetBets (WSB) to guide investment decisions was a poor investment strategy for the most part of 2021.
According to Capital.com’s research conducted between 21 January and 17 December 2021, the ten most mentioned stocks on WSB generated negative monthly returns at least 59% of the time during the year, with an average weekly loss of 1.6% and a monthly loss of 6.7%. The losses increased further to 8.2% on a quarterly basis.
In one out of four times, monthly losses amounted to over 10%. The research reveals that the notable role WSB played in driving the GameStop and AMC hype in early 2021 was not replicated across other ‘meme’ stocks mentioned on the forum after 21 January 2021.
The findings bring into question the reliability of community forums such as WSB as a source of investment advice. Commenting on the findings, David Jones, Chief Market Strategist at Capital.com said:
“With the likes of GameStop and AMC making headlines for its outsized returns early last year, meme stock trading has become more than just a passing fad. This is a worrying trend as the risk-reward trade-off for meme stocks is not widely understood. The team at Capital.com analysed the relationship between hype and stock returns to help our clients understand the risk of relying on community forums for investment decisions.”
The data also revealed the highly volatile nature of meme stocks with returns showing extreme swings and significant losses when held over longer periods of time.
For example, someone who invested in Tilray one day before its hype day and held it for one week would have made a 39.1% gain on their investment, but if that same investor held the stock for three months they would have lost 47.3%. Even if someone had invested just one day after the stock was hyped up on WSB, they would have made a 76.5% loss on that investment if they continued to hold it for three months.
Other lessor hyped stocks on WallStreetBets such as Plug Power, Riot Blockchain, Brooklyn Immuno Therapeutics and Beach Body all produced significant losses when held for three months.
This illustrates the potential dangers of selecting stocks based on momentum and hype rather than technical or fundamental analysis.
“People who trade on hype or rumours fueled by speculative forums like WSB are exposed to high risk-reward ratios. Investing in stocks based on a company’s fundamental factors such as earnings, revenue or future growth potential could help avoid the wild swings that occur when the hype fades”, added Jones.
Capital.com’s findings are based on the analyses of 4,855 stocks listed on the Nasdaq, New York Stock Exchange and the American Stock Exchange mentioned on WallStreetBets throughout 2021. 176 of these stocks made it into the WSB top ten most mentioned stocks at least once during the year.
For further information on how WSB has affected retail trading watch our video here
About Capital.com
Capital.com is a high-growth investment trading group of companies empowering people to participate in financial markets through secure, low-friction, innovative platforms that take the complexity out of investing. Its intuitive, award-winning platform, available on web and app, offers investors a seamless trading experience to over 3400 world-renowned markets. To help investors trade with confidence, the platform is enabled with robust risk management controls and transparent pricing while its all-in-one Investmate app delivers extensive financial lessons and educational content to support clients in their investment journey.
Capital.com has clients in over 180 countries with offices located in the UK, Gibraltar, Australia, Cyprus and Belarus. In 2020, the platform reported a 700 per cent growth in its client base, making it one of Europe’s fastest growing investment trading platforms with more than 2million clients.
Capital Com (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). Capital Com SV Investments Limited is Authorised and regulated by the Cyprus Securities and Exchange Commission (CySEC), under license number 319/17.Capital Com Australia Limited is authorised and regulated by the Australian Securities and Investments Commission (ASIC) under AFSL Number 513393.
To find out more, please visit: www.capital.com
