Investing has never been more readily accessible than today. Now, almost anyone can open up an investing account, often with no minimum investment.
Social media has caused an investing frenzy, pushing the idea that you can become a millionaire overnight. Reddit has quickly become one of the most popular (and scandalous) sources of investing ‘tips’.
Well, not always. Let’s take a closer look at the many flaws in the Reddit stock picks system.
What are Reddit stock picks?
Reddit stock picks are pieces of advice provided in a Reddit forum, such as r/WallStreetBets or r/Stock_Picks by anyone on the internet who is interested in investing.
In these forums, members vent about their devastating losses and brag about their risky wins.
How do they work?
The members of these Reddit communities cause the stock market to fluctuate by "hyping" up a particular company, convincing members to put their money into that stock, and then make the stock move up.
Within the r/WallStreetBets forum, members often post viral content called 'meme stocks' to grab attention and start conversations to send certain stocks "to the moon."
Why are Reddit stock picks a bad idea?
Reddit stock tips and advice are problematic because they can be created and circulated by literally anyone on the internet, including complete investing beginners who do not have the education required to be giving advice.
5 Times Reddit Tried to Send a Stock to The Moon
Often, members' efforts of fluctuating a particular stock do work, and a stock is sent “to the moon,” which means that its value increases drastically and quickly.
Let’s look at 5 times that Reddit tried to send a stock skyrocketing, and their implications.
The GameStop short squeeze of 2021 was perhaps one of the most infamous in the last decade, rocking the foundations of the US stock market.
- On January 11th of 2021, the company announced that they were bringing in a new team of board of directors, sending the stock up by 13%
- GameStop rose to a whopping 134% because of the hype circulated about the video game company on r/WallStreetBets
- Investors following the Reddit forum inflated the GameStop stocks, and short-sellers had to buy shares to cover their billion-dollar losses. vg
In situations like GameStop, there are very few winners – as is the nature of the stock rocketship.
In 2020, BlackBerry’s stock was around $6 – but when it looked like the pandemic was ending, there was a massive dump of tech stocks, including BlackBerry.
- Investors in the r/WallStreetBets forum started hyping up the stock, sending it soaring to 341%
- The Redditor's idea was to pump up the price as high as they could and then send it crashing back down, which inevitably happened
- BlackBerry stock crashed back down to 57% over the week, which was a nightmare for late investors, with many of them losing money yet again.
3. AMC Entertainment Holdings Inc.
The feeling of hostility against large financial institutions among Redditors was responsible for the surge of AMC Entertainment Holdings stock as well.
- Redditors viewed the surge as a chance to “fight back” against the hedge funds on Wall Street, sending AMC’s stock from $2 to $75
This sort of “pump and dump” activity is unsustainable and causes a lot of damage to the average retail investor.
4. Cleveland-Cliffs Inc.
ClevelandCliffs Inc. is one of the most popular stocks within r/WallStreetBets. Redditors are suggesting that there will be a short-squeeze in the near future.
However, with the short-squeeze mentality, you may as well buy a lottery ticket, because your chances of winning are just about the same!
5. Tilray Inc.
This Canadian medical cannabis producer was the latest coordinated social media target.
This photo is an example from r/WallStreetBets of an average investor who listened to the social hype, bought, and lost.
In early 2021, shares of Tilray rose by 50%, bringing their gain up to more than 670%.
Why are Reddit stock tips dangerous?
Reddit stock tips can be incredibly dangerous to the average investor – especially so for investing beginners – for several reasons.
- Stocks are often randomly selected, so the stock often lacks the fundamentals required for a good investment.
- For example, Dogecoin was randomly selected due to the ‘meme’ culture attached to it.
- There is usually little to no research behind Reddit picks, so they are risky by nature.
Not everyone wins
- No matter how credible a Reddit tip seems, there will always be losers.
- The few success stories you hear are not an accurate representation of your odds – there are thousands of losses for every win.
- If a stock needs to be pumped in order to make you money, then it’s not a stock you should consider investing in.
- Stocks should fluctuate very little, therefore giving you a more sustainable return on your investment in that stock.
- Reddit users banding together to manipulate a stock is considered illegal, but not many Redditors know this.
- If the intention is to artificially fluctuate the stock market to see a financial gain for themselves, it is an unlawful act.
Advice from uneducated investors
Remember: the vast majority of the forum writers do not have the education or legitimate experience to give financial advice.
If you are to take advice from any platform or app, you must ensure that it is backed by professionals in their field who can offer honest, sustainable advice for achieving financial freedom.
What can I use instead of Reddit as a beginner investor?
Let’s talk about Crux Investor, the platform that gives you one curated stock recommendation per month for a stress-free investing experience.
Why trust Crux Investor?
- Their team is entirely composed of professional analysts who are industry veterans.
- Everyone on the team understands stocks and knows what investments you should make to have a sustainable portfolio.
- The team identifies the single best stock to bring to their community, unlike Reddit’s erratic suggestions.
For less than a dollar per day, you can get professional, honest advice from industry analysts who know what they’re doing.
Say goodbye to gambling with your money like you’re in a Vegas casino, and say hello to sustainable, profitable investing.