Public.com adds Safety Labels to “risky investments”
Online brokerage and social trading startup Public.com, which last week blocked its members from buying shares of bankrupt car rental company Hertz, has announced that it is adding what it called Safety Labels for investments which it deems are potentially risky.
According to a Public.com blog post on the matter, the stock market has been one of the greatest drivers of wealth in human history and the U.S. stock market has an annual return rate of about 10 percent on average.
Still, one of the very first things a professional will tell you about investing is that it’s never without risk. Just because the stock market goes up over time doesn’t mean it always goes up. And not every stock is bound to go up, even if that is the direction of the overall index.
These times are especially unprecedented and volatile. Volatility in the market could mean opportunity, but it could also mean unpredictability and risk, especially for certain types of stocks and investment strategies.
Individual securities come with varying degrees of risk. Public.com has stated that it wants its members to understand when something is potentially risky, and so it is adding Safety Labels to a subset of securities on its platform.
These labels appear before an investor makes a purchase, providing additional context before confirming the buy.
Currently, Public.com said that it is adding a label to potentially risky stocks as cited by the SEC, as follows.
1) Companies that filed for bankruptcy
Per the SEC, investing in bankrupt companies is risky because “although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares.”
Lately, with Hertz being a very good example, there had been some rampant speculation by (mainly) retail traders around the shares of companies which have declared bankruptcy.
2) Stocks with very small market caps
Market cap is a key indicator of a company’s total net worth and is calculated by multiplying the share price by the total number of outstanding shares. The SEC notes that micro-cap (between $50MM and $300MM market cap) and nano-cap (below $50MM market cap) stocks can be risky for a couple of reasons. First, it might be more challenging to get data and information from smaller companies, which can lead to misinformation. Second, micro-cap and nano-cap stocks tend to be more volatile and less liquid.
3) Specialized ETFs (namely, inverse and leveraged ETFs)
According to the SEC, leveraged and inverse ETFs are risky because they are designed to achieve their objectives on a daily basis. The performance of these ETFs in the long-term can be substantially different than the daily objectives, meaning that “you could suffer significant losses even if the long-term performance of the index showed a gain.”
Stocks with the Safety Label can still be purchased on Public.com’s platform. The company said that its aim is not to restrict the investment options available to members; rather, to ensure novice investors are aware of relevant information before they decide to invest.
That said, Public.com states that it fundamentally believes that there are certain investment approaches that necessitate a higher degree of experience. The SEC considers day-trading, for example, to be riskier than longer-term investing because you are more susceptible to fluctuations in stock price given the narrower timeframe.
Public has a strict no day-trading policy.
The company also said that it will continue to evolve the social features of its product, which offers what it calls a unique opportunity for people to build their financial literacy within a broad community of investors.
Founded two years ago and co-run by well-known FX industry executive Jannick Malling and serial web entrepreneur Leif Abraham, Public.com boasts a number of celebrity investors including actor/rapper Will Smith, NFL star JJ Watt, and popular Youtuber Casey Neistat.