Investors have become aware of meme stocks surging to record-breaking levels. Social media conversations and many headlines described fast gains exceeding 1,000%. The information provided caused some trending speculative stocks to appear exceptionally attractive.
Trades in highly volatile stocks based on unsubstantiated rumors, however, may come with serious risks. Investor fraud or misrepresentation may play a role in online misinformation. As noted by Compliance Week, companies failing to meet financial reporting requirements caused the U.S. Securities and Exchange Commission to suspend trading in several meme stocks.
Unusual volume may raise suspicions
Artificially inflated prices may have resulted from a surge in meme stocks that were not in compliance with SEC reporting rules. Suspicions of market manipulation by popular social media account users caused some of those individuals to come under investigation.
Traders who act in a coordinated manner to artificially inflate or deflate a security’s price may face charges. Market regulators may prove traders intentionally posted false or misleading information about a stock to experience a gain. The resulting penalties may include hefty fines or imprisonment.
Bots may have responsibility for stock price surges
Researchers discovered automated software programs flooded social media websites with information regarding meme stocks. As reported by Mashable, bots assisted a heavily traded meme stock to increase in price from $20 to about $350 per share by hyping it online.
Investors often post conversations concerning their opinions of various stocks online. When bots take over, however, the dynamics change. An excessive degree of over-hyped rhetoric may cause investors to trade based on misinformation.
Traders who recognize manipulative or unrealistic online information typically avoid serious losses. Those investors harmed by trading based on misleading online posts may file a legal action seeking damages.