Following the historic rise of r/WallStreetBets last year, interest in the stock market surged to an all-time-high. However, the popular Reddit community has been plagued with a multitude of complaints, such as strict moderation, misleading stock advice and groupthink. That’s where Commonstock steps in.
“We built Commonstock as a community and tool to help self-directed traders become better investors,” Commonstock CEO and founder David McDonough told InvestorPlace in an exclusive interview.
Last October, Commonstock announced that it had raised $25 million in its Series A funding round. The round was led by acclaimed hedge fund Coatue Management and included other funds such as Floodgate and Upside Ventures. Earlier backers include reputable names such as Bill Ackman, Stanley Druckenmiller and Dan Loeb. With such a notable list of investors, it isn’t shocking that Commonstock is quickly picking up popularity among the retail crowd.
Commonstock: Financial Transparency at Its Best
Launched in 2017, Commonstock operates as a financial social media platform that seeks to provide investors with a transparent and open-minded community. The platform is unique in that users can connect their existing brokerage with Commonstock and display their returns publicly. By showing returns, other investors on the platform can verify the reputability of a user.
Why is this important? Well, anyone could publish a post on Reddit or Twitter (NYSE:TWTR) detailing their bullish view on a stock. However, it’s impossible to prove whether that user is actually invested in that stock without further verification.
A prominent example of misleading and fraudulent investing advice centers on Steven Gallagher, who ran a 70,000-follower Twitter account under the alias “Alex DeLarge.” Starting in 2020, Gallagher used his Twitter account to engage in a series of pump-and-dump schemes.
As part of the scheme, he would first buy shares in companies with low volume and liquidity, like penny stocks. Afterwards, Gallagher would announce to his followers that he had purchased the stock, oftentimes posting false and misleading tweets about the company’s potential. As a result, the company would experience a sudden rush in price based on his followers buying the stock. Gallagher then used this price appreciation as an opportunity to secretly dump his position for a gain.
The U.S. Securities and Exchange Commission (SEC) eventually caught wind of Gallagher’s tactics and arrested him last October. In total, the Twitter trader made more than $1 million from the illegal scheme.
As the SEC explains, “Pump and dump stock schemes cause mistrust in the market and have real victims who often invest large sums of money, only to have their hopes shattered by a fraudster’s greed.”
The Bloomberg Terminal for Retail Investors
With Commonstock, users can view other members’ real-time portfolio allocations to each stock. Furthermore, if an individual user connects their brokerage to the platform, only their portfolio holdings, weight and returns will be publicly displayed. The monetary value held in a user’s brokerage account will remain confidential.
“The ability to link a brokerage helps people trust the source of insights, see skin in the game, and find alpha,” explained McDonough. In addition, participating in investing with peers who provide honest information makes it easier to “learn life-changing aspects of finance, business and economics.”
Upon the onset of Covid-19, many people were drawn to the stock market as they quarantined at home. McDonough highlighted that the pandemic left many people in isolation, hungry for connections with their family and friends. This lack of excitement from daily activities led many individuals to an easily accessible and exhilarating entity: the stock market.
However, many of these individuals would find out that the stock market isn’t just an easy, money-making machine.
With the prevalence of investing communities on Reddit, Discord and Twitter, the spread of misinformation and false claims quickly became a recurring theme. According to a survey conducted by Investing.com, one in five investors said that they used Reddit to help guide an investment decision. Oftentimes, investors would blindly follow accounts who had large followings into bad investment ideas. In fact, McDonough stated that most financial communities are full of “snake-oil salesmen.” In many situations, the people with the largest following or the “loudest voice” receive the most attention, even if they post “uniformed or unhelpful ideas.”
Now, Commonstock is stepping in to offer a more transparent option.
Commonstock provides investors with a combination of several proprietary tools that are unavailable elsewhere. “We’re building the Bloomberg Terminal experience, but for retail, starting with content and community,” said McDonough. For starters, the platform allows you to see the most bought and sold stocks out of all users during the past week, month, 3 months and year. Users also have access to a leaderboard which shows the platform’s top-performing investors.
In the image of transparency, Commonstock provides a unique feature called “follower’s assets.” This feature allows you to see the combined monetary value (not individual) of all of your followers who have connected their brokerage with Commonstock. For example, McDonough has a follower’s asset figure of $610 million. Theoretically, a user could see someone with such a high follower’s assets figure as having an increased sense of reputation and investment skill. However, the figure is just another broad instance of the platform encouraging users to be transparent with their holdings.
What’s Next in Commonstock’s Quest for Alpha?
With the widespread use of the internet today, retail investors have access to a variety of resources that could potentially provide asymmetric upside. However, it’s up to the individual investor to select which tools to use — and which tools to ignore.
Looking forward, the financial platform plans on boosting its proprietary tool offerings, with features such as “advanced data visualizations, portfolio analytics, [and] new content formats.”
In addition, Commonstock plans on rolling out anticipated crypto and Web 3.0 developments. McDonough added that “I don’t want to spoil anything, but I will say that I’m excited to find ways to reward our community members.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.