Canadian investing app Wealthsimple adding a ‘risky’ label to certain stocks after a social media based movement sent shares of GameStop, BlackBerry and others soaring up to 1,700 per cent.
The GameStop stock page on Wealthsimple’s app advises users that the ticker, GME, is considered risky and that traders should expect high volatility.
The Toronto-based robo-adviser suggests that investors who want to trade the stock place a limit order with a set price.
AMC Entertainment and BlackBerry stocks also carry a warning on the app after prices whipsawed this week, posting steep gains or losses from day to day.
Wealthsimple has said it will not restrict trading on certain securities, after TD Bank said it would increase margin requirements for short-selling and uncovered options of GameStop, Express Inc. and AMC Entertainment Holdings Inc. on the New York Stock Exchange.
But Wealthsimple chief investment officer Ben Reeves said on the company’s website that followers of the GameStop frenzy could end up being worse off from the trend, adding that trading based solely on online forums is a “pretty lousy strategy.”
“If you have a disproportionate amount of your money in a single stock, I would be concerned for you. If your position is small and you are doing this for fun, I’m not too worried, even if you don’t have a great trading strategy,” said Reeves in an article on Wealthsimple’s magazine website.
Earlier this week, Wealthsimple said that had seen “incredible growth” on its platform steadily for months, and that the most popular stocks recently have been Tesla, Air Canada, Shopify, and Apple.
Yesterday, Reeves said that GameStop’s volatility this week will hopefully be “a learning experience that’s not too expensive” for investors.
“Is ‘I am buying because the stock has gone up a lot” really your trading strategy? And if so, is that a viable and repeatable one? I’d argue it isn’t for most individual investors,” said Reeves in the article. “Either way, the other question is: do you have criteria for when you will get out?”
A statement from Investment Industry Regulatory Organization of Canada said the regulator is “concerned” about the impact the increased volatility may be having on some investors, pointing to its use of single-stock circuit breakers, which “are designed to give the market a pause” when a stock moves suddenly.
The regulator said it is important for investors to avoid “betting the farm” on inaccurate or misinterpreted investing information, referencing a bulletin released this fall to help investors.
“In recent months, we have seen an increase in people who are turning to Do-It-Yourself investing and this is why we created an investor bulletin,” the regulator said.
Tracey Bissett, a Toronto-based chartered financial analyst, said it will be interesting to see if the practice of labelling risky stocks continues. Bissett said such labels would ideally have disclosure and transparency around how Wealthsimple came up with the “risky” assessment. Some online investment products are marked with a sentence that notes the inherent risk of any investment, but the warning is sometimes not very prominent, she said.
“It would be challenging for them to do it all the time, because they may run into fundamental differences of opinion with the companies, so they might open themselves up to liability,” said Bissett.
Bissett added that there is a risk that labelling risky stocks could potentially perpetuate an idea that investors don’t need to do their own research on investing risks.
“What if they get into something that Wealthsimple didn’t label as risky, and then something happens?” said Bissett. “I think there’s a whole can of worms that could open up there.”