A few weeks ago the financial markets were rocked when the stock of Gamestop, a company facing major financial issues, shot from around $13/share at the beginning of December to over $350/share at the end of January. Why did this happen, how did this happen, and what does it mean for the small investor going forward?
Rise of trading platforms and forums
The internet has truly revolutionized our society. News, information, and ideas are transmitted instantaneously. The speed of dissemination of information has truly been unprecedented. Consequently, this has allowed amateur investors to get the same information that financial experts have.
Financial firms saw this change and it opened the gateway for trading firms like Sogo Trade and E-Trade that are geared towards small investors have mainly an online presence. Now even the major B&M firms such as Fidelity have strong online investing capabilities.
Leveling the Playing Field – the home investor and the hedge funds
One of the reasons why this story has gone viral is it pitches the classic story of David vs. Goliath. On one hand, you have these multi-billion dollar hedge funds that can change the momentum and pricing of stocks just due to their sheer size. When these and other institutional investors bet on the direction of a stock, it is hard to counter that direction.
Enter Wall Street Bets forum on Reddit and other personal investing forums. With the advent of online forums, people can gather around a virtual water cooler and exchange information no matter where they are in the world. So through a concerted effort (with some Twitter posts from famous people), a bunch of amateur investors drove up the price of Gamestop.
The problem? There were certain hedge funds that had taken a short sell position on this stock.
One side wanted the stock to go up and the other wanted it to drop….who won out?
The amateur investor.
Chaos in the markets
All of this resulted in days of turmoil in the financial markets. News outlets ran headlines about how these billion-dollar hedge funds were brought to their knees. It made for great news.
The result was that short-sellers and players in the options markets such as certain hedge funds lost billions of dollars while these forum investors made tens of thousands of dollars and “beat” the big guys at their own game. It did appear that David was able to at least severely injure Goliath and that has brought forth a feeling that collectively, these investors can rock the financial markets. It is akin to tiny ants. An individual ant is not very threatening but have you seen a swarm of ants carrying a large load? It is truly an impressive sight.
Even a few weeks after the turmoil, Gamestop, the stock at the center of this turmoil, has surged 100% and it appears that the micro traders have returned!
With virtually the same tools available to the micro trader and the power of online collaboration, the sway that huge institutions have over the stock market is starting to swain. Is this an aberration or is it truly the start of a new movement of stock market capitalism?