Game Stop, Reddit and Robin Hood are three words you’ve probably heard about in stock market news this last week. With nearly a two thousand percent jump in share price, here’s how Hedge Funds lost billions over dwindling stock, GameStop:
Wall St. Shorts A Wounded Beast
For those who don’t know – GameStop (NYSE: GME) is a US listed business that has certainly seen better days. Due to a poor fundamental story surrounding the business and a bleak future outlook. It became leaked that some large, multi-national hedge funds (the big boys of Wall St.) had massive short positions on the stock.
As a short seller you’re betting on the price going down, so when internet forum Redditt caught wind of this – hundreds of users thought it would be a great idea to stick it to Wall St. by purchasing an excessive number of shares in order to drive the price higher. As host Andrew Baxter describes, Wall St’s. once a wounded beast of GameStop now had some serious momentum. Behind it as retail investors were able to rally the troops and take the other side of the trade.
Active Investor Activity
After coming across leaks of various short sold positions on GameStop and Reddit users piling on. The stock, Wall St. saw one of the largest price movements in history over just a couple of weeks. Banded together with the view of sticking it to Wall St, Reddit users managed to cause a $19.75 stock to increase to a whopping $347.50 from just January 11thto just January 29th – that’s a 1,642% increase in the share price.
HOLY SMOKES! This is a representation of extreme volatility and price manipulation. Caused merely by a group of internet trolls labelling it as ‘Active Investor Activity’. On the other side of the ledger – Morgan Stanley reported a near $ 6B loss on part of the Hedge Funds throughout this occurrence as they were forced to unwind their positions. Taking both a hit to their balance sheet and their precious egos. A classic example of David vs. Goliath.
The Power of People
Typically, in the past, hedge funds have been able to create so much momentum behind their trades. As the ‘big players in town’ to which in most cases has always ended up being a self-fulfilling prophecy. As their trades become ‘leaked’ and thus many follow to take their lead, many retail investors have been caught on the other side of the coin and have lost some serious dough. However, in today’s world (mainly due to the internet) we are starting to see a paradigm shift in the power of the people.
Taking Tesla as an example which was once the most shorted stock on the market, retail investors were able to rally together and drive the price up – the GameStop occurrence is really no different. With anonymous pseudo names online, yes this may be a form of pure market manipulation, however, it is also a great show of how strong retail investors can be when they create these tribes. On the back of this, says host Andrew Baxter, we may start to see more online retail investors try to emulate the same thing. On other businesses before the regulator catches up. Already we know that the SEC has undertaken a thorough investigation into the matter. Albeit are finding it difficult in such circumstances where the users involved are completely anonymous.
A Shift in Investor Behaviour – Greater Issues
To no surprise are we seeing the regulator (the SEC) try and work out why and how this happened. And what to do next time in order to stop it. As we know that the regulator tends to lag behind market trends. Investors are looking to take advantage of what internet momentum has to offer, posing some greater issues at hand. With trading platforms such as Robin Hood for example (a gamified booking platform), social media apps. And the desire for young investors to experience the immediate gratification on their trades – these kinds of whacky events were always bound to happen.
As host Andrew Baxter says – this is a reflection of investing in the modern day as no longer are the younger generation using ‘their dads’ broker’, instead they are relying on social media for their tips and trading on gamified online providers to play red or black at the casino. Something they tend to have a lot of fund doing.
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The Stock Market Doesn’t Have to be Crazy
No doubt, the GameStop debacle is one that will make its mark on the history books forever. These once off events of craziness happen, however they don’t happen that often if you know where to play the game properly. For anyone who’s thinking that the stock market is a crazy place – try taking a look at more paint by numbers. Safe approach to investing that allows you to sleep easy whilst your money works hard. If that sounds of interest to you, check out Australian Investment Education for more info.