Cardify CEO Derrick Fung provides insight into his stock shortfall study, explaining that 50% of GameStop investors were first-time traders.
The frenzy surrounding the share of GameStop may have subsided, but the excessive influence that small investors have had in the saga is likely to remain.
No one expects another supernova like GameStop to happen again, where a group of investors with smaller pockets helped increase a struggling company’s share by 1,000% in two weeks. But the tools they use can be used over and over again if smaller investors stay on social media forums, and if regulators do not change the rules to impede it.
After all, these smaller players, called ‘small investors’ in the industry to differentiate themselves from hedge funds and other large companies, use many of the same tactics as the professionals. And if retail investors continue to weigh more heavily, the results are likely to swing sharper for some stocks than they would otherwise have had, if not in GameStop’s spectacular measure.
GameStop’s wild ride is driving professional investors around for more volatility in the market, and politicians in Washington are asking who gets hurt. A House committee is calling several players from the GameStop saga Thursday after a hearing titled ‘Game Stopped? Who wins and loses when short sellers, social media and retail investors clash. ”
“I do not think we are going to see major reforms that prevent this,” Tony Casey, a law professor at the University of Chicago, said of the rise of social media-driven commerce. “All the parts of this will still be here in a few years, and we’ll probably see versions of it.”
Exhibit A may have come even earlier than many expected. Just last week, the stock of several pot producers burst higher, with medical marijuana producer Tilray more than doubling in three days, just over half in the next two. Some of the boom was due to real news, including a Tilray agreement to distribute medical cannabis across the UK. But smaller investors are also stepping into equities.
“It’s time to get on the cannabis cart if you are not,” one user posted on Reddit’s WallStreetBets forum, a hub for smaller investors and perhaps the starting point for the GameStop saga.
However, the cannabis trade lacks one key element of the GameStop drama: it’s definitely not about sending a message to hedge funds. It’s more about the excitement of brave transactions that can explode in a good or bad way, and the camaraderie of sharing the gains and losses on the internet with others.
In the long run, a Wall Street saying that ‘the fundamental factors’ always win. This means that the price of a stock ultimately determines where it should be, based in part on how much profit a business makes. The recent pullback to Earth for GameStop’s inventory may be proof of that.
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What GameStop did, however, was show how a group of smaller investors working together can dramatically boost a stock in the short term. Many market watchers believe that hedge funds and other professionals also played a role in the rise of GameStop, but they probably only accelerated the pace caused by retail investors.
The market has seen similar events before. Last summer, Wall Street was shocked when shares of Hertz rose, though it was likely to be canceled and worthless because the company protected bankruptcy.
The moves can be even more spectacular if a stock builds heavy bets, bets that will benefit if the stock price falls. This can be called a ‘short press’, where a rise in the price of a stock forces skeptical traders to get out of their bets. To do this, they have to buy shares of the stock, which raises the price even higher and creates a feedback loop. GameStop was an extreme example because some of the shares were sold short several times.
It is now smaller investors who can do the pressure. Together, they account for 20% of total trading volume, said CFRA Research analyst Pauline Bell. It will rise from 10% to 15% during 2019 and most of 2020.
The communication they can do on social media is to give the smaller investors even greater. This is one part of what makes the recent movement an evolution of the day trading craze of the late nineties.
It was cool then for small investors to drive technology stocks like JDS Uniphase higher, but although they had access to internet chat rooms, they did not have a Reddit or other social media to quickly strengthen their voice and convince others to join in as well. to come. They also did not have the ability to trade stocks on their phones while sitting on a bank with little else to do in the midst of a pandemic while paying no commissions.
“We believe that a structural change may be underway and that retail investors are likely to remain major players in the US stock market in the future,” Lori Calvasina, head of US equities strategy at RBC Capital Markets, wrote in a recent report.
Think of Bartosz Skokuń, a 27-year-old computer programmer in Wroclaw, Poland. His investments were fairly conservative until he bought GameStop shares a month ago, after a friend told him about it and WallStreetBets from Reddit.
He has made a healthy profit on GameStop, and he expects to keep in touch with WallStreetBets, by searching the many stock ideas that users on the forum offer to find opportunities he wants. Some ideas about what is known as r / WSB are brilliant, he said, and others are ‘completely stupid’.
Therein lies the beauty of it, he said: ‘those people share their ideas and effort for FREE because they can talk to others, discuss it, learn in a group. If there is such a thing as r / wsb power – it is! ‘The group has more than 9 million members, and many share their attention to their ideas.
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What can limit the influence of smaller traders? A steward regulatory hand from Washington, for one. Thursday’s hearing before the House Financial Services Committee will testify to hedge fund executives, the company behind the popular Robinhood trading app and Reddit. It will also include a prominent user on RedStit’s WallStreetBets who previously believed in GameStop’s inventory.
Washington can choose the paternalistic path and restrict trading to smaller investors so they can not so easily push up the price of a stock and burn it later when it falls, said Casey of the University of Chicago. But it will anger small investors who want to trade just as freely as hedge funds.
“Politicians can rather target short sellers,” but Wall Street is not a powerless lobby either, “Casey said. According to the industry, sales are helping to make markets more efficient.
Another deterrent could be the pain that some retailers are nursing after buying GameStop for $ 450 and now seeing it closer to $ 50. But even there, there is skepticism.
“I’m hopeful that some of the speculators have learned their lesson,” said Rich Weiss, chief investment officer of American Century Investments’ multi-asset strategies. “But it seems to be a lesson that people need to be reminded of over and over again.”