GameStop’s stock is plummeting, but the Reddit rebellion is just beginning

This is due in part to trading restrictions by Robinhood and other brokers on how many volatile stock stocks like GameStop, AMC (AMC), Express (EXPR) and Nokia (NOK) that retail investors can buy in a single stock at a time.

“I have no doubt that there are funds and big players who have sold these shares again thinking they are smarter than everyone else on the WSB,” said Dallas Mavericks owner and investor Shark Tank in a Reddit AMA. “I know you will hate to hear that, but the lower it is, the more powerful the WSB can be preparing to buy the stock again.”

“Social investment is not going to go away,” said Kerim Derhalli, CEO and founder of Invstr, a trading app. “This is a powerful business trend and we are just at the beginning of it. People have more information and power.”

Younger investors took control of the market

“Younger retail investors are in touch with the changes that are taking place. They understand consumer trends because they are the ones who make and create them,” said Derhalli. “There are some Millennials making a lot of money and there are hedge funds angry that retail investors have come into the game and are beating them.”

Still, several Wall Street veterans fear that it will not end well for smaller investors.

They point to the collapse of dot-com / technology stocks in 2000 as a sign of what can happen when retail investors get very excited and lose focus on fundamentals like sales and profits – not to mention valuations.

At that time, the commercial frenzy was built on forums like Raging Bull and Yahoo Finance, as opposed to Reddit and Twitter.

“This is worrying and disconcerting. It could be like March 2000 again,” said Richard Smith, CEO of the Foundation for the Study of Cycles, a research firm.

“What it did most of all was to expose how gamified the stock market environment is, and we hope people will ask whether or not this is how we want markets to work,” added Smith.

If average investors end up being burned by stocks like GameStop, it could lead to less confidence in Wall Street and the market in general.

Some less experienced investors may simply give up ownership altogether – as many individuals did after the 2000 crash and again when Lehman Brothers imploded in 2008.

“The market will be destabilized. Many people will lose money. Fewer people will participate in the stock market – no more,” said Sergey Savastiouk, founder and CEO of Tickeron, an artificial intelligence platform for traders and investors.

“What’s happening with GameStop and AMC is like driving without a license,” he added.

This time, it may be a little different, after all

But there are some important differences between now and two decades ago – not to mention the Great Financial Crisis of 2008-2009, a time when social media and free online commerce were not as ubiquitous as they are now.

Average investors can now trade more efficiently and economically, thanks to brokerages without fees, such as Robinhood – a move that essentially forced all other major brokers to cut commissions.

The rise in fractional trading (that is, owning a certain dollar amount of a high-priced stock like Amazon or Alphabet) and the popularity of index ETFs also makes it easier for investors to buy small portions of many shares.

And Reddit’s megaphone is significantly louder and more influential than the old chat groups of the late 1990s.

“This trend is not going to end anytime soon. There are some investors who act in the area of ​​individual stocks only once. But there is a fear of losing,” said Gust Kepler, founder and CEO of BlackBoxStocks, a trading software company.

“This may not look much different from the late 1990s with day traders, but now social media increases the ability of investor groups to come together and share information in real time,” added Kepler.

In that regard, even Smith, of the Foundation of Cycles, expressed reluctant admiration for Reddit traders who figured out how to get short sellers.

“I have respect for those who saw what was going on, how it worked and explored it,” he said. “But what value was created?”

Stocks like GameStop and AMC are not increasing in value because they are generating high revenue and profit, paying big dividends or adding significant juice to the economy by creating thousands of jobs.

But that misses the point. There is no rule that says investors should only buy big blue chip companies. Some investors are getting tired of buying safer and passively managed index funds and want to gamble.

“Individual investors are often considered risk averse. But not all are,” said Josh White, professor of finance at Vanderbilt University and a former economist at the SEC. “Some have a preference for what is more like a lottery.”

“They can lose many times, but from time to time they will do a home run like GameStop,” said White. “As long as there is great success, people will continue to play.”