Your Guide to Investment Trends
Cryptocurrency, environmental, social and governance (ESG) investing, do-it-yourself accounts, short selling – these are just a few emerging areas and trends we’ve seen in the investing world. These emerging areas and trends have gained a lot of media attention and you’ve probably seen discussions on social media within your friend groups. Investment trends and terms are constantly changing, especially as more ways to invest become available. It can be hard to understand what people mean when they use terms like short squeeze, ESG and cryptocurrency. But before jumping on the latest investment trend, consider these questions and risks so you can make sure it’s a fit with your situation. Be knowledgeable and informed about the choices you’re making.
Why am I investing?
Trends come and go, and no one likes feeling left out or that they’ve missed out on something everyone else is in on – especially if it means the possibility of leaving money on the table.
Fear of Missing Out
When thinking about a new investment, ask yourself “Why am I investing?” Are you keen to jump in because all your friends are? The fear of missing out (FOMO) is real, and social media is just one more channel where you can feel pressure to “join the club.” A lot of scams use this high-pressure tactic to present all the investment opportunities you are supposedly missing out on. But remember — investing is not one-size-fits-all. You can explore investments your friends are discussing, but make sure the investment is appropriate for you before putting your money on the line. Seek out unbiased and reliable information sources beyond the social media hype.
Does it fit my risk tolerance?
All investing involves some level of risk, and certain investment products and practices may not fit your risk tolerance. Products like cryptocurrency, for example, are extremely volatile and risky and aren’t the right choice for everyone. Let’s look at some of the current trends and some risks you should consider about each.
Trends and terms demystified
Crypto assets and Cryptocurrency
Crypto assets are purely digital assets that use public ledgers over the internet to prove ownership. They may be used as a medium of exchange, a way to store value, or for other business purposes. Crypto assets have no inherent value and generally operate independently of a central bank, central authority or government. Their value is based solely on supply and demand in the market.
Cryptocurrency (or virtual currency) is likely the most well-known type of crypto asset. Cryptocurrency is a digital currency or medium of exchange that is generally not issued by a government or central authority. Fiat money is a currency that is issued by a government or central authority. Most modern paper money, including the Canadian dollar, is fiat currency. Cryptocurrency was created as an alternative to fiat money, but cryptocurrency is not considered legal tender in Canada. It can be used to exchange for products or services, or for speculative purposes such as trading on a crypto asset trading platform (CTP).
Anyone considering speculating, buying or trading crypto assets should have a clear understanding of the asset and the risks involved. As a relatively new technology, there is no guarantee that the demand for crypto assets will grow or be sustainable. Several areas of risk associated with crypto assets include high volatility, liquidity risk, online risk, technical and cybersecurity risk, and heightened potential for fraud.
Recently, scammers have been offering investment opportunities that claim to provide guaranteed returns and recruitment bonus compensation packages. These are often red flags of fraud and should be approached with caution. Crypto assets are extremely volatile and guaranteed returns in a crypto-related investment are extremely unrealistic and unlikely.
Learn more about the risks involved in buying or trading crypto assets and report fraud immediately using our Submit a Complaint tool. You should also be aware of the CRA’s guidance on the tax treatment of cryptocurrency.
Short Selling
When someone “shorts” a stock, they sell a stock they have borrowed, hoping the price of the stock will fall. Then they buy it back at a lower value to replace the borrowed shares and keep the difference. They’re essentially gambling on that stock’s performance, believing it will drop in value before they must replace the borrowed stock. But, if the stock’s value doesn’t drop or goes up, the short sellers lose money, because they must still replace the borrowed stocks regardless the current cost. Short selling is an advanced and risky investment strategy that is typically more appropriate for experienced investors who are comfortable with and able to afford the substantial risk.
Short Squeeze
The word short refers to the idea of short sales, and the word squeeze refers to the pressure placed on investors who initially shorted the stock. When a borrowed stock increases in value instead of losing value as initially anticipated, the short seller is forced to buy back the shares at a significant loss. The need for short sellers to re-purchase the shares they borrowed can create additional demand for the shares, which can drive prices higher. Some people have recently used social media to encourage investors to buy certain shares that have large short positions to increase the price of those shares and trigger a short squeeze scenario. There is no guarantee that a short squeeze will occur for any given stock, and those who purchase these targeted stocks may lose some or all of their investments. Further, promoting or advising others to participate in purchasing these targeted stocks, even on social media, may amount to violations of securities laws.
ESG Investing
Environmental, social and governance (ESG) investing is a strategy in which an investor considers performance and impact in ESG factors to determine which companies they will consider investing in. An investor considers how these factors align with their own moral stance, but also how the company’s ESG performance will impact long-term profitability. ESG factors an investor considers could include:
- a company’s climate change policies or carbon footprint
- diversity and inclusion in hiring
- ethical supply chain sourcing
- executive compensation packages
- conflict of interest policies
These are just a few examples an investor may consider when wishing to drive change through their investing decisions. When considering ESG investing, it’s important to do the same due diligence as for any investment. Make sure you understand the company and that the information the company discloses is complete and meaningful. This is an emerging area and fraudsters tend to follow the headlines. Some unscrupulous opportunities may use a lot of buzz words with little substance to back it up. Be wary of “too good to be true” opportunities presented as a sure thing.
DIY Investing
There is no shortage of investment apps that offer a Do-It-Yourself (DIY) approach to managing your investment portfolio. While some knowledgeable investors can be successful with a DIY approach to trading, it can be risky. Analysis and research of the companies and a proper understanding of the characteristics of the investments you are considering are important when making investment decisions. Be sure that if you are considering investing on your own, you have the time to devote to this research. Markets are volatile, and many factors can impact the level of risk an investor is willing to take on. Not understanding risk tolerance can result in a DIY investor making unsuitable investment decisions. If you don’t have a clear understanding of how much risk you can take on, or the time to research and analyze the investment and understand the tax implications, you may want to consider working with a professional or seeking professional advice before proceeding to take it on yourself. Learn more about types of investment risk you may be exposed to as an investor.