An army of amateur traders loosely organized on Reddit messed up preconceived notions about the stock market when they fueled the meteoric surge in GameStop stocks.
Stocks of GameStop, the electronics retailer that has had big problems in recent years, are up nearly 2,000% since the start of the year. Its shares were trading at around $ 350 on Wednesday, compared to less than $ 18 per share earlier this month – which essentially translates to $ billion worth of stockholders.
On Wednesday alone, the hot stock surged more than 100% after Tesla and SpaceX CEO Elon Musk continued to fuel the flames on Twitter after markets closed on Tuesday.
The subreddit r / wallstreetbets, in which amateur investors come together to exchange investment ideas and thoughts, has meanwhile developed into a community of almost 3 million people. Coupled with the increasing popularity of trading apps like Robin Hood, these so-called retail investors who do so alone without the help of hedge funds or money managers have shown immense, unprecedented power over the financial markets.
Many traditional market watchers have scratched their heads at GameStop as the company has closed stores in recent years and, for the most part, struggled to make a profit.
Scott Galloway, professor of marketing at New York University’s Stern School of Business, said a number of factors sparked the “nitro meets glycerin” response that led to the explosive rise in GameStop stock.
“What we have is the perfect rush of stimulus money, a cohort of younger investors – or some people would call them gamblers – coming into the market,” Galloway told ABC News. “And we also have these platforms that promote these types of mass-trade weapons in the form of margins [calls] or options that create that explosive upside effect. “
“Also, you have the social media fixation of stock picking, where individuals, including Elon Musk, can post a one-word tweet and a stock can skyrocket 50% in hours,” he added. “It really is the perfect volatility storm for stocks.”
Cameron Bublick, 20, a student at Rutgers University in New Jersey, told ABC News that every day I wake up “the first thing I do is go on Robin Hood and check out the app.”
Noting that Robin Hood is removing traditional barriers to entry for people trying to get into the stock market, Bublick said it was “basically available to anyone with a smartphone”.
“It makes it available to a wide variety of people,” he said. “You don’t have to meet a regular broker or the like to do that. You can do it all from your phone.”
Bublick is also an active reader of the r / wallstreetbets subreddit and says a lot of it is satire or joke: “I think subreddit has a lot of good advice there when you can find out what people are saying in general, to take out what is actually worthwhile. “
Still, the student admitted that many of his trading ideas are “very impulsive” and that “a lot of what people do is essentially gambling”.
He explained how the community has been able to move markets by saying “you pull it up by posting about it” and that helps “raise the price based on the demand for the stocks”.
“Do I think GameStop is worth $ 220 a share? No, I think retail as a whole is going to kind of die out. I mean, I know personally where I am, I’ve probably seen four or five GameStops have in closed their doors last year or so. “
Still, the stock is “only worth as much as people think,” added Bublick.
He said that many of his friends treat investing “almost like a game” and admitted that some have even lost their savings.
NYU’s Galloway said the approach was similar to “going into a casino and that means you don’t invest, you gamble.”
“And the history of the people who build economic security through this type of trading activity is quite rare,” he noted.
The reach and power of these loosely organized, Reddit-inspired investors became more tangible on Wednesday as they essentially defeated two large institutional investors.
Citron Research said in a YouTube video on Wednesday that it let loose the majority of its bets that GameStop stock would fall, and suffered a huge loss in the process. Hedge fund manager Melvin Capital also admitted to CNBC on Wednesday that the fund had taken a significant loss as he let go of his GameStop shorts.
“This has caught the attention of America and all dealers and non-dealers alike,” said Andrew Left of Citron Research in the video about the GameStop saga, in which he suffered a “100%” loss. He added that he respected the market and had “respect for the people on Wall Street bets and on Reddit message boards.”
Ultimately, Galloway said, the newfound strength of these everyday investors also raises a number of new questions.
“The question is, do these retail investors understand what they are doing? And does their excessive influence pose a risk to the markets?” he said. “Do we have a new level of systemic risk brought into the market by people who, if you will, appear to be gambling more than they are actually investing?”
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