Learn about four current trends in self-directed investing according to Claude-Frédéric Robert, President of National Bank Direct Brokerage (NBDB).
In recent years, direct brokerage has experienced rapid change, namely through new platforms, a new generation of investors, and multiple sources of information. Here’s what I think we need to understand right now with respect to self-directed investing, and why caution is always required.
The influx of new investors has generated strong demand for investment information. Advice and opinions now come from a multitude of sources, without the authors necessarily being recognized experts. We’re on information overload.
Having access to information is a good thing, but it’s easy to get lost in a mass of data and make costly decisions. I recommend checking how credible the sources you consult are and how cost-efficient their investment advice is.
It’s also important to diversify your sources of information. Ask questions before basing your investment decisions on the advice of a single person. And since information knows no borders, don’t be afraid to look outside the country.
In the specific case where an investor is looking to purchase stock in a company, it’s in their best interest to step back and ask the right questions. What is the business model of the company they’re interested in? What are its earnings and comparables? Are there research reports available? What do analysts who follow the company have to say?
To help investors, self-directed investing platforms offer tools that gather information and allow investors to make informed decisions.
In short, serious investors must crosscheck any information they find online or on social media.
The meme stocks phenomenon made waves earlier this year. Users of the WallStreetBets forum on Reddit began talking up GameStop, influencing each other to buy the stock and artificially inflating the price.
Media coverage of the case sparked even more interest and incited other investors to buy shares in the video game company. The more media coverage it received, the more people followed the forum, and the more people participated in the volatility of the stock and in others.
Meme stocks can be highly volatile, since the stock price is not based on the actual value of the company or on fundamentals. Rather, it’s driven by spontaneous speculation from viral web posts. Sooner or later, the price will eventually reflect the stock’s actual value and potential. That being said, it’s difficult to predict if and when the trend will peter out.
In my view, it is perfectly legitimate—and even desirable—for influencers and the media to take an interest in stock market phenomena and explain them to the public. However, we’ve seen this spur investors to act without proper information in the hopes of making a quick buck, a highly risky proposition indeed. The authorities are now looking into this to determine whether new regulatory measures are needed.
A few years ago, Bitcoin was a virtual currency with no value, confined to more marginal circles of speculators. Today as we can see, there is growing demand for virtual currencies, and values can vary overnight.
There is a lot of information out there. Terms like “blockchain” or “cryptocurrency mining” are being bandied about. Several ETF issuers took advantage of this trend with the launch of products increasing exposure to this sector.
People are discovering there are hundreds of virtual currencies, some of which rise suddenly in value, much like the Dogecoin. This cryptocurrency enjoyed a glorious heyday in May but has been falling ever since. All it takes is for an influencer to post a tweet or a video for thousands of investors to click the “buy” button.
More than ever, our clients want to know if they should get on board. Caution is in order. Cryptocurrencies are not always regulated and are highly volatile. It’s possible to make money, but it’s still very speculative. Will you keep your eye on the latest news and be ready to sell fast when the time comes?
Targeted investing is more and more popular. Investors have realized they can wield clout by asking companies to be more committed not only to the environment (E), but also to social issues (S) and corporate governance (G). It’s a “tectonic plate movement” in the world of finance, where social values sometimes take precedence over financial returns, especially among younger generations.
We’ve seen a tendency among clients to want transparent information on the practices of the companies they intend to invest in. How can they be sure that a company respects the environment? That it has good governance criteria? That it reflects the diversity of society with teams and people from different backgrounds?
I think it’s important to provide self-directed investors with tools to rate companies based on various criteria, including ESG, so they can adjust their purchases to their personal values.
In short, self-directed investing is all about knowledge and experience. The important thing is to stay informed, sort through all the information available, and resist jumping on bandwagons. Seeking out trustworthy information and talking to specialists will always pay off.
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