- Last June, retail investors piled into shares of bankrupt car rental company Hertz, pushing their value up.
- In August, Tesla’s popularity among retail investors soared after it announced a stock split.
- In September, investors got a taste of what happens to stock prices when there’s a lot of activity in the short-term options market.
- And last week, GameStop’s wild ride showed what could happen if retail investors banded together to drive a “short squeeze” on a company.
✍️ Connecting The Dots
Retail investors have historically had no real control over the movements of multi-billion dollar stock markets. But commission-free trading apps are changing that: more and more individuals are committing their cash to stock markets, in turn growing retail investors’ combined influence – especially over smaller companies.
And last week, retail investors showed they’ve become a stock market force to be reckoned with. Even as retail traders have had their know-how played down by institutional investors, they identified that buying into highly shorted stocks and “squeezing” the price is as good a short-term investment strategy as any. That explains last week’s events, then. Even now, over 120% of GameStop’s available shares are being used to bet the price of its stock will fall.
But it’s a strategy that comes with a lot of risk: purchases of those shares temporarily stopped after brokers – who’d initially allowed traders to buy into the likes of AMC Entertainment and GameStop – cited liquidity concerns. That saw demand from would-be buyers dwindle, which limited how much money sellers could get for their shares.
All this led to cries of market manipulation that’ve since caught the attention of lawyers and government officials. What happens next is anyone’s guess – but suffice to say it’s likely institutional investors will take their retail counterparts more seriously now.
1. The proof of the pudding is in the profits.
Quiver Quantitative’s “WallStreetBets” portfolio – which tracks the performance of the five most-mentioned stocks on the forum in a given week – is up 62% in the past year to mid-January. The S&P 500’s 15% rise pales in comparison. It’s no surprise, then, that social media-informed stock picks have gained such a following. Not to rain on WallStreetBets’ parade, but individual stocks are risky, and that means doing your own research – whether that’s on the company’s fundamentals, timing your investment, or transaction costs – is vital.
2. Investing and trading is a two-way street.
It’s great to be on the winning side in the short term, sure, but you’ll eventually need to convince other investors to pay a high enough price for your shares to make a profit. That’s easy when the buyers are squeezed short-sellers desperate to reverse their original bets by buying back shares: you can almost name your price. But once that demand dries up – and if remaining buyers think a stock’s only worth what it was before the squeeze – you could be in line for serious losses if you didn’t sell up early on.
🎯 Also On Our Radar
Stock and bond market valuations are high at the moment, but relative to record-low interest rates, they’re actually reasonably priced. That could all change if central banks even hint at raising interest rates, though, which is why keeping an eye on the US Federal Reserve and any upcoming rate hikes is essential. Good thing last week’s update showed no sign of that, then…