Following are the cautionary warnings and risk factors for investors when availing research or participating
in short-term market strategies:
Retail investors should clearly understand that all capital market investments involve risk, and that
short-term investing or trading in volatile market segments carries a significant risk of capital loss.
Short-term trading, including trading aided by the use of financial leverage, derivatives (futures &
options), or margin accounts, can lead to severe, rapid, and unanticipated losses for retail investors.
Investing in Bubbles or Manias: Financial "manias" or market "bubbles" refer to the rapid
escalation in the market price of an asset, reflecting high collective enthusiasm or speculative
exuberance detached from underlying fundamental valuation metrics. This rapid ascent is almost inevitably
followed by a sharp contraction. The contraction, or panic sell-off, occurs when wide-scale liquidation
causes precipitous downward spiral in valuations.
Momentum Investing: Another strategy posing heightened hazards for retail participants is
momentum chasing. An investor using momentum strategies seeks to capitalize on the continuation of
existing price trends. Momentum assumptions presume that strong upside price action will persist; if that
expectation proves invalid or turns abruptly, severe capital destruction occurs.
Noise Trading: Noise trading occurs when an individual makes buy or sell decisions
without fundamental data (economic indicators, balance sheet scrutiny, earnings quality, or valuation
bounds). Noise traders typically suffer from poor timing, herd mentality, and overreaction to unverified
market rumors and social media sentiment.
Margin and Leverage Risks: All investing carries risk. If you invest using broker margin,
futures, or option contracts, these risks are exponentially magnified. Margin trading (utilizing borrowed
funds to buy securities) is not appropriate for conservative investors. Prior to trading on margin,
remember:
You can lose substantially more capital than your initial cash margin deposit;
You may be required to deposit additional cash or collateral on extremely short notice to cover
mark-to-market losses (a "margin call"); and
Your broker can liquidate your positions at prevailing market prices without prior notice if
maintenance margins fall below thresholds.
