Stock Market Craziness
The stock market has been getting a lot of attention this past week. Words like GameStop, hedge funds, and Reddit have been flying around pretty much every major news outlet. People seem to be very interested in what’s happening, so I figured I’d postpone my originally scheduled article and instead attempt to explain, as simply as possible, what’s been going on.
There are three main characters in this story: GameStop, Redditors, and hedge funds.
Like many companies that are struggling, GameStop was the target of a lot of short-sellers. Short selling is placing a bet that a stock will crash. This is a strategy big hedge funds use and they were the ones who held the majority of these short positions in Gamestop.
Enter a popular Reddit page called WallStreetBets where people go to talk about their stock picks. In a backstory that would take too long to explain, this Reddit group decided that GameStop stock was undervalued and began buying as many shares as they could to boost its stock price. And it worked.
This group’s mission resonated with other traders who joined in and the stock was small enough that the price began to increase. Then the media began to pick up on the escalating price movement and it gained even more momentum from there.
GameStop’s stock price skyrocketing was not a good thing for the hedge funds that held short positions. So, to prevent extreme losses, they had to “hedge” their bets by buying GameStop stock, which caused the stock price to rise even more.
All of this crazy buying activity caused the stock to rise around 1,900% in two weeks.
Many of the Redditors and other buyers also bought call options on the stock, basically amplifying their returns a hundredfold, and became millionaires in a matter of weeks. This caused serious FOMO for those who didn’t own shares. So, because of their sudden success, people started doing the same thing to other stocks like AMC, Blackberry, and Nokia.
As I’m writing this, the most recent development is that trading platforms, like Robinhood, Vanguard, etc., have stopped allowing investors to trade stocks like GameStop and AMC. This was like dumping gas on the fire and has caused an uproar.
Now, of course, people are taking sides and politicians are getting involved. Undoubtedly, this saga will continue. I’m not interested in getting into all of that, but I do have a few takeaways I want to share.
There are some people who have and will make a lot of money from this. That does not mean you should rush in with your life savings and think that you can achieve the same results.
The people who got in early will probably make good money if they time their sell-offs right. It’s the late adopters, everyone who hears about it from the news or their brother-in-law and invests at the height of the craze, who usually end up getting burned.
Because the prices of these stocks are artificially inflated and not based on any real underlying economic value, there’s likely a significant crash coming. That aside, it’s generally never a good idea to put all of your eggs in one basket. Putting your entire life savings, or a large chunk of it, into any single stock at any time, is risky.
Those who are looking to use the stock market as a way to double their money overnight treat it like a casino. They’re making frequent, highly speculative trades in the hopes that they hit it big. But don’t kid yourself into thinking this is investing; it’s just another form of gambling. Some will win, most will lose.
If you are one of the lucky ones to get in early, you may make a lot of money. Good for you. Pay off your loans, buy a house, or switch to a more sustainable investment strategy. Whatever you do, do not fall into the temptation of thinking you can repeat your luck.
“I made a fortune getting out too soon.” — JP Morgan
This isn’t the first or the last time something crazy like this will happen. The stock market is nothing if not an entertaining spotlight on human nature. As I’ve written before, watching some people get rich while you’re not can make even the smartest people do dumb things. So, when something like this pops up, I like to refer to one of my favorite quotes:
“A genius is the man who can do the average thing when everyone else around him is losing his mind.” — Napoleon
Thanks for reading!