Photo by Breanna Hardy.
GameStop stock was on a roller coaster ride and sparked outrage on Wall Street after hedge funds lost a lot of money. The culprits were amateur traders who joined forces through Reddit, an online community discussion platform.
Local experts say this incident is unique because of the role of social media and is likely to lead to regulatory changes.
Tim Dodd, financial planner and owner of Dodd Wealth Management in Fresno, said the public needs to understand short selling to understand what happened to the GameStop madness.
The Reddit users did it.
Where normally the value of a stock would reflect the company’s success, Reddit users have collectively shifted the market in their favor by buying a large amount of stocks that underperformed stocks.
“Basically, for every person who wants to buy 100 shares of a stock, another person must have a person who wants to sell 100 shares of that stock. Some people, in this case Wall Street, borrowed GameStop stock from their brokerage firm and sold them, assuming the price would go down. Once they’re down, they turn around and buy the actual stocks at a lower price. Then you have to return it like anything else that has been loaned. The short sellers essentially keep the profit from the price difference, ”Dodd said in an email response.
Nick Allen, an investment advisor at Brouwer, DeJong & Associates of Fresno, said, “Conceptually, shorting a stock is primarily about the belief that companies are poorly managed or disadvantaged and that their stock prices may fall. When stock prices fall, these hedge funds make money, ”Allen said.
Demand for stocks soared, rising from about $ 17 per share to a high of $ 300. As of February 1, the stock was just under $ 230. On February 2, it fell to $ 117 at around 9 a.m. and closed at $ 90. GameStop, along with AMC and BlackBerry, are just a few of the stocks that have increased volatility. As of February 16, GME will be valued at $ 49.11 per share.
“It is probably the busiest week of fourth quarter earnings season, one that rocked businesses as a whole as they continued to suppress and beat all earnings expectations,” Allen said.
Although the stock has fallen, the event sparked some sort of rebellion, and financial advisors wonder how history could repeat itself.
“The extreme buying activity of some of Wall Street’s most unloved stocks pushed stock prices up. This development caused a number of hedge funds to unwind their short bets this week, creating volatility,” Allen said.
Economic data has been mixed, but Allen said financial advisors still believe the economy is poised for robust growth this year.
He believes that the temporary volatility should not distort investors’ view of the stock market as a whole.
“Expect volatility to stay elevated for a while, but the longer term, investors need to look through this headline noise that just turns into speculation and therefore leads to the importance of diversification – you know your risk tolerance and invest accordingly,” Allen said.
Though the stock market might calm down after the GameStop frenzy, social media is here to stay. KC Chen, the Fresno State Department of State’s Department of Finance and Business Law Chair and Professor of Finance, spoke about the role it played in the process.
“We have seen a lot of short bruises in the past, but this time it’s different because it’s initiated through social media,” said Chen. “As you know, the power of social media, with so many followers, it can be such a brief squeeze.”
Chen said these retail investors are fighting the “big boys” or hedge funds that are selling stocks. He told his students that traders these days are like an army of ants moving an elephant.
“When so many people work together, they can kill the opposing forces,” said Chen.
It was evident that these amateur investors were doing their research, Chen added.
Dodd said that Reddit users are required by law to trade GameStop stock. “There is a relative risk associated with every investment. Unless they responded to inside information or manipulated the stock price to take advantage, I don’t think they broke the rules, ”Dodd said.
Chen believes the authorities are still investigating the matter.
“I think the SEC (Securities and Exchange Commission) needs to investigate whether this is some kind of tampering first,” said Chen.
Robinhood – a popular, commission-free stock trading app – stopped GameStop stock trading at the height of the frenzy.
“What if these stocks default on payments? Then [Robinhood] will be held liable, ”said Chen.
“Whoever started this thing – these people are very smart, but whether or not they have good intentions I don’t know,” added Chen.
But he said there’s really no way you can prevent this from happening with social media right now. It’s unlike a decade ago, and he believes the SEC needs to put more regulation in place to ensure the market isn’t rigged.
Financial advisors continue to speculate on whether this will set a pattern for shorter shortages that put big bucks against Wall Street.
However, before restrictions are imposed – if possible – brokerage firms have a say.
“In the meantime, brokerage firms are expanding and / or limiting what they allow to gain margins (or borrow) so they can meet their redemptions. Adjustments are already being made to trading platforms. When it comes to the extreme volatility of trading a single stock, remember that you have two sides – one that wins big and one that loses big, ”Dodd said.
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