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You may remember a hype around GameStop and stories of investors turning $500 into $200,000. Stories like this can cause the investor to fall victim to the cognitive bias – bandwagon effect. Just because more and more people are buying GameStop, you may want to join the group and be included in making a lot of money fast. The cognitive bias makes it easy to jump in without doing your homework. You may ask yourself: What can go wrong if everybody is doing it? Investments that are based on hyped news and popularity, without fundamental reasoning, are very risky. At some point, the market price will have to match the true value of the company. The disaster will happen sooner than you think, when reality settles in. It is very difficult to time the market and be the first one out of the door. When suddenly the music stops and everybody runs for the exit, the price will fall dramatically.

There will be many more GameStop like companies in your life. You will hear many classical pump-and-dump stories of people trying to profit from trusting investors. Pump-and-dump scheme is illegal activity by perpetrators trying to boost the stock price through false, misleading or greatly exaggerated information (Investopedia). The perpetrators have already purchased the stock at a low price and want others to drive the price higher based on false information. The perpetrators will then sell shares at a higher price.   

Besides unpleasant learning experience, large speculative losses have come with a significant negative social impact on investors. Many investors in speculative securities will lose a lot of money. With large losses, these investors will also lose confidence in the financial system. They will be afraid to invest again and will miss on future opportunities to benefit from the financial system. These people will have a more difficult time bridging the inequality gap without the stock market’s help. That is a negative social effect of the stock market on new investors.

Do your homework before you invest, if there is no fundamental value behind the stock price, it becomes a speculative bet. You can invest some of your money that you can afford to lose. Your main portfolio should be well diversified with good quality companies or broad market ETFs.  

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