Tiffany Hagler-Geard | Bloomberg | Getty Images
The stock market is known for being unpredictable and volatile, and any sense of normalcy was inflated during the recent GameStop rally.
Most of us know the story by now: After discovering that several hedge funds had bet on the loss of value of the video game store, people gathered on the Reddit forum WallStreetBets to increase the stock price by 1,500%. During January, GameStop’s stock price rose to a high of $ 483 from a low of $ 17.
The bubble seems to be bursting already, with GameStop shares falling to around $ 55 from Friday.
Still, the event is unlikely to be forgotten anytime soon, experts say.
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The Reddit forum of private investors pledging to conquer Wall Street still has more than 8.5 million subscribers (or as they call themselves, “degenerating”). And Netflix is already in talks to make a movie about the battle between giant hedge funds and a bunch of individual day traders.
Plus, experts say the event tells us about what people are bringing to the market today – and what that could mean for investment in the future.
More bubbles
In many ways, the GameStop rally is like bells from the past, but it also has some unique features, experts say.
“What’s new is the scale and speed of the event,” said Veljko Fotak, an associate professor of finance at the University of Buffalo.
The ubiquity of smartphones for people to download investment apps, the availability of cheap or free trade, and “a pandemic of lots of restless energy,” are all factors that contributed to the video game retailer’s rally, said Dan Egan, vice president of finance and finance. invest with Betterment.
Populism spreading around the world is yet another factor that sparked the bubble, Fotak said. “Some investors were motivated not only by sheer greed, but also by the desire to ‘keep it going,’” he said.
Many people today are also marketed when they see friends or people they follow on social media promoting certain stocks, said David Sekera, chief US market strategist at Morningstar. Some of these posts are very compelling – users on Reddit, for example, exchanged high-level analytics on GameStop’s finances.
“The days when stock research was limited to the big, bulging Wall Street companies are long gone,” Sekera said.
All these events that propelled the GameStop bubble could trigger many more.
“I really think this herd of Reddit movement will continue to some extent,” said Jason Reed, a finance professor at the University of Notre Dame. “We have already started to see the move to other stocks and assets, such as AMC, Blackberry and Silver, gaining significant momentum.”
When GameStop’s stock tumbled on Feb. 2, many Reddit users claimed they were holding their shares or even buying more, writing that it wasn’t a loss until they sold out.
Source: Reddit
Investing more people is positive, but only if they do it wisely, experts say.
For example, those who buy stocks based on social media posts often take risks with money they can’t afford to lose, Egan said.
“One of the biggest concerns is that newer investors are seeing a ‘hot’ stock but not fully understanding the implications of investing in it,” he said. “Many private investors could lose their shirts.”
Fotak said he read about a recently graduated law student who said he was delighted with his wins at GameStop.
“He could now afford to pay off his student loans,” Fotak said. “Yes, there is a lot of greed going on here.
“But there is also a lot of despair,” he added. “I really, really hope he sold it right away.”
Short circuit less?
Hedge funds that had GameStop shorted suffered huge losses when the day traders on Reddit bought the stock en masse and the price skyrocketed. For example, Melvin Capital lost more than 50% in January.
Those setbacks can make other investors more timid about shorting or betting on stocks, experts say.
“After seeing several other funds on stretchers being taken off the field from these short positions, hedge fund managers will be much more cautious about the stocks they will be willing to go short,” Sekera said.
Less short circuits means a less healthy market, Fotak said.
Bubbles are less common in countries where short sellers are less restricted, he said. That’s because short seller’s pessimism can offset some of the optimism about a particular industry or stock.
“And in this environment, with market valuations at record levels, we need more than ever the contrary views of short sellers,” added Fotak.
Another benefit of short sellers is that they often expose serious problems with companies that other investors and regulators have missed, Fotak said.
“Because they are looking for companies that are overvalued, they are always on the lookout for fraud,” he said, adding that they often publish research on companies’ bad practices.
And so it’s a shame the GameStop debacle can curb short circuits, Fotak said.
“To the extent that the release of negative information slows down, we all suffer from a less efficient market,” he said.