They fit the bill as demon stocks, which can defy fundamentals or prevailing market conditions, and hard to spot or catch. These stocks can equally crash and burn quickly, producing supercharged volatility that authorities frown upon.

“People are willing to pay more for [demon] stocks, which is similar to buying an overpriced lottery ticket, even though these stocks might have not-so-good fundamental performances,” said Zhang Xiaoyan, associate dean of PBC School of Finance at Tsinghua University in Beijing. While retail traders play a significant role in market developments, “the caveat is that they have limited financial literacy, which is why the regulators now want to aim at investor protection through education,” she added.

China’s retail investor base is made up of 206 million accounts, with a collective buying power of 24 trillion yuan (US$3.55 trillion), according to official statistics. They contribute 70 per cent of the daily trading volume on onshore stock exchanges.

Their pursuit has prompted several lists of likely demon stocks. One of them contains small-caps like electrical transformer maker Shenzhen Invt Electric and adhesives products maker Shenzhen Cotran New Materials, though both have slumped 21 per cent since end-July.

“It’s usually a small cap with a relatively low starting price of below 20 yuan,” said Lu Daoyin, a quant trader who blogs about markets on ByteDance-owned news app Toutiao and social e-commerce platform Xiaohongshu. “As a demon stock, it must align with the latest and hottest topics, which can appeal to big funds or big retail investors.”

Lu has suggested a way to catch the demons, using the KDJ technical indicator to predict changes in stock trends and patterns. The best time to buy is when all three measures in purple, white and yellow surpass the 80-point threshold, he added.

Alman Liang, 35, recently sold her shares in Zhejiang Construction, which has rallied 222 per cent this year, after the stock became a hot topic online before the recent outbreak of Covid-19 cases, a signal to sell as latecomers join the rally.

“It’s easy to drive up the prices of small-cap stocks, and when retail investors dive in, market manipulators with relatively large funds would leave,” said the Shanghai-based financial professional, who has been investing for seven years. “Then it’s game over.”

Zhang, who is also professor of finance at Tsinghua’s PBC School of Finance and co-authored “Understanding Retail Investors: Evidence from China” in 2019, said when these smaller retail investors trade, they are more likely to follow momentum strategy, which is to buy previous day winners and sell previous day losers.

“They are more likely to show behavioural patterns such as overconfidence and gambling preferences,” she added. “These traits all contribute to our finding that they have a negative predictive pattern for future price movements.”

Still, a healthy dose of speculation may be part and parcel of any growing or mature market, said Wang Chen, a partner at Xufunds Investment Management in Shanghai. This year is no exception. As China’s monetary easing goes against tightening bias in major economies, betting on stocks that can profit from policy stimulus has been rife.

Most demon stocks are linked to the state agendas and hot headlines, such as technology self-sufficiency to carbon neutrality and zero-Covid policy. At least 18 stocks have surged by more than 50 per cent this year, while four have more than doubled

Nothing beats a punishing loss for a lesson in bad investing habits, according to Wang at Xufunds Investment. Demon stocks exposed small investors to pump-and-dump manipulation that characterised the onshore markets from its early days.

“The best education is to let the market educate investors,” he said. “I believe that most demon stocks will return to fundamentals and their basic values. Losing money from these stocks is a very good experience for education.”