Tiffany Hagler-Geard | Bloomberg | Getty Images
The stock market is known to be unpredictable and volatile, and any sense of normality was blown up during the recent GameStop boom.
Most of us already know the story: after discovering that several hedge funds had bet on the loss of value of the video game retailer, people gathered at the Reddit WallStreetBets forum to raise their share price by 1,500%. Throughout January, GameStop’s stock price skyrocketed to $ 483, from a $ 17 low.
The bubble already appears to be bursting, with GameStop’s stock dropping to around $ 55 on Friday.
Still, the event is unlikely to be forgotten soon, experts say.
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The Reddit forum of retail investors who promise to take on Wall Street still has more than 8.5 million subscribers (or as they are called, “degenerates”). And Netflix is already in negotiations to make a film that dramatizes the real battle between giant hedge funds and a group of individual day brokers.
Furthermore, experts say the event tells us about what is bringing people to the market today – and what it might mean to invest in the future.
More bubbles
In many ways, the GameStop rally resembles the bubbles of the past, but it also has some unique characteristics, experts say.
“What’s new is the scale and speed of the event,” said Veljko Fotak, associate professor of finance at the University of Buffalo.
The ubiquity of smartphones on which people can download investment apps, the availability of cheap or free transactions and “a pandemic with a lot of restless energy” are factors that have contributed to the recovery of the video game retailer, said Dan Egan, vice president of finance and invest in Betterment.
Populism spreading across the globe is another factor that fueled the bubble, Fotak said. “Some investors were motivated not only by pure greed, but also by the desire to ‘impose it on men’,” he said.
Many people are also brought to the market today when they see friends or people who follow social media promoting certain actions, said David Sekera, chief US strategist for Morningstar. Some of these posts are very convincing: Reddit users, for example, exchanged high-level analyzes of GameStop’s finances.
“The time when stock research was limited to big Wall Street companies is long gone,” said Sekera.
All of these events that propelled the GameStop bubble can spur many more.
“I really think that, to some extent, this herd movement on Reddit will continue,” said Jason Reed, professor of finance at the University of Notre Dame. “We have already begun to see movement in other stocks and assets, such as AMC, Blackberry and silver gaining considerable momentum.”
As GameStop’s stock plummeted on February 2, many Reddit users claimed to be holding their shares or even buying more, writing that it would not be a loss until they ran out.
Source: Reddit
More people investing is positive, but only if they do it wisely, experts say.
Those who buy stocks based on social media posts, for example, are often at risk with money they can’t afford to lose, said Egan.
“One of the biggest concerns is that newer investors see a ‘good’ stock, but don’t fully understand the ramifications of investing in it,” he said. “Many retail investors can lose their shirts.”
Fotak said he read about a recent law graduate who said he was overjoyed with his GameStop victories.
“He could now pay off his student loans,” said Fotak. “Yes, there is a lot of greed at stake here.
“But there is also a lot of despair,” he added. “I really, sincerely hope that he sold it right away.”
Less short?
The hedge funds that had sold GameStop suffered huge losses when Reddit’s group of day traders bought the shares en masse, skyrocketing their price. Melvin Capital, for example, lost more than 50% in January.
These setbacks may leave other investors more fearful of going short or betting against stocks, experts say.
“After seeing several other funds being carried off the field on stretchers from these short positions, hedge fund managers will be much more cautious about the shares they are willing to sell,” said Sekera.
Less short sales means a less healthy market, Fotak said.
Bubbles tend to be less common in countries where short sellers are less restricted, he said. That’s because short sellers’ pessimism can balance part of the optimism about a particular sector or stock.
“And in this climate, with market assessments at record levels, we need more than ever the opposing views of short sellers,” added Fotak.
Another advantage of short sellers is that they often expose serious problems in companies that other investors and regulators have missed, Fotak said.
“As they are looking for overvalued companies, they are always looking for fraud,” he said, adding that they often publish research on companies’ bad practices.
And so it’s a shame that the GameStop disaster could contain shorting, Fotak said.
“As it delays the release of negative information, we all suffer from a less efficient market,” he said.