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LONDON – A surge in retail stock trading over the past year lit the fuse that sent GameStop Corp. shares soaring higher for no clear business reason, market watchers say, squeezing out hedge funds that had bet. against the video game retailer and other companies that were out of favor on Wall Street.
What’s going on? Here are some answers:
BEHIND THE RISE OF RETAIL INVESTOR INTEREST
More people have invested in stocks during the 2019 coronavirus disease (COVID-19) pandemic, and experts cite a number of reasons. Lockdowns boosted savings, policy stimulus put cash in people’s pockets, and extremely low interest rates drove investors to the stock market. Additionally, a proliferation of trading apps allowed anyone with a smartphone to buy or sell stocks for free.
The share of retail investors in U.S. equity order flows increased to nearly 20% in 2020 from 15% in 2019, while long-term-only fund orders fell to 6.4% on last year from 9.7% in 2019, data from the Swiss bank UBS showed.
This year’s data suggests further growth. Online broker eToro said it registered more than 380,000 new users in the first 11 days of 2021, adding to the 5 million who used it last year, for example.
Retail investors are also buying stock options, the right to buy or sell stocks at fixed prices without putting up cash up front. That takes your dollars much further and can drive stock price movements.
WHAT HAS BEEN THE IMPACT OF THIS INCREASE ON RETAIL TRADE?
Large US tech companies were among the beneficiaries last year. Facebook, Amazon, Apple, Netflix and Alphabet, which owns Google, all posted record inflows as their businesses benefited from the lockdowns and their shares soared.
With unprecedented stimulus and easy money policies from central banks, investors switched to smaller stocks, especially those that were defeated during the pandemic.
The market capitalization of world stocks soared to a record $ 88 trillion, a whopping $ 33 trillion jump from the March floor. In recent days, GameStop shares have risen 1600%, with big gains also for shares of AMC Entertainment Holdings Inc., Blackberry Ltd., Nokia Oyj and others.
WHAT IS HAPPENING IN REDDIT AND SOCIAL MEDIA?
Many traders and analysts find that online discussions of stocks on social media platforms such as Reddit, Twitter, and Facebook drive massive stock price movements that cannot be explained by fundamental news or traditional valuation metrics. Retail investors have long discussed the stocks on social media, but during the pandemic these forums appear to be gaining more influence. Investors pointed to discussion threads like “WallStreetBets” on Reddit to fuel the rise on GameStop.
Professional investors are paying attention. Dennis Dick, a stock trader in Las Vegas, said he reads the Seeking Alpha site before work and keeps up by checking Twitter, but last weekend he also joined a group on Reddit “because I need to know what’s going on. “.
HOW HAS THIS AFFECTED HEDGE FUNDS AND PROFESSIONAL TRADERS?
Massive stock price swings for no apparent reason have caught Wall Street off guard. Short sellers, or investors who bet the price of a stock will fall, are being crushed. Melvin Capital, a well-established hedge fund, suffered massive losses on its bets that GameStop stock would fall.
Traders struggling to cover these short positions and avoid further losses had to pay inflated prices, adding more fuel to the rally. Several traders told Reuters that this phenomenon, the classic short contraction, attracted more retail investors hoping to ride the wave.
WHAT ARE THE RISKS?
With global stock markets on the rise since March despite the devastation of the real economy by the pandemic, investors and analysts are warning of asset bubbles. If the markets turn, overvalued stocks will fall with them. Many trading platforms also offer loans to investors to buy stocks and increase their returns. In a bear market, that could end up with people caught on the wrong side of the trade. – Thyagaraju Adinarayan / Reuters
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