Trading stocks has always been a rich man’s game, with institutions being the ones who find the most success. The reality is the game isn’t fair, risk lowers as funds increase because being able to purchase multiple stocks is always safer than investing everything in one. The rule of having a diversified portfolio is, if one stock goes down the rest of the portfolio will still be making money. However, most retail investors (regular people) don’t have the disposable income needed to diversify. A couple of years ago retail investors only accounted for 10 per cent of all trades that went on in the market, for most people getting involved in stocks seems difficult and expensive. However, during the pandemic, many people were looking for something to occupy their time, with new investment apps being easier to set up and with lower fees than traditional options it was the perfect situation to get more people investing. According to estimates from Robinhood, (a new online brokerage firm) retail investors now account for about 30 per cent of all trades as of 2021.
Brokerages have always had major advantages over retail investors, with massive teams dedicated to researching the market it has almost impossible for a regular person to compete. Recently a new generation of traders have emerged going online to Twitter and Reddit to discuss stocks. This shift in trading perspective has given Retail investors a chance to balance the investing game a little more. Hundreds of thousands of people are sharing what they’ve learned online, and are learning from each other what stocks have potential. Many of the those sharing online are professional traders sharing their knowledge with each other and the new traders. This coupled with the new trading apps that allow instant stock price updates and trades, are giving the regular people a chance to compete with the brokerages.
One stock was the victim of attention from the retail investors, GameStop. Early in the year, one man, Keith Gill “Roaring Kitty” realized that the brokerages were shorting the Gamestop stock (betting money it would go down). Although shorting is a common practice in trading, in this instance it was shorted an abnormally high amount. To understand why this is important, know that with shorting an investor borrows shares from someone else, sells them and then will have to return them to the person they borrowed from, after a set amount of time. The intention with a trade like this is for the price of the stock to fall, that way when the shorter has to re-buy the shares they owe they have to pay less, thus making a profit. However, in GameStop’s case, there were way too many people shorting, over 100 per cent of shares were shorted. This is excellent for people like Keith because given enough public attention it could cause a the stock price to rise high enough that shorters would have to buy back their shares pushing the stock price even higher. Not long after Keith posted an article with his findings online, it got a lot of attention. Within a few months, the price of GameStop rose from $5 to about $350, which is about a 7000 per cent increase. This massive jump cost one hedgefund that was shorting GameStop, Melvin Capital about $5 billion dollars, or about a third of its net-worth.
This tactic of finding which stocks the institutions are betting against and buying them has become the staple of the new internet investors. Just this week alone people have managed to push the AMC stock from $10 to around $75, which is also an unordinary occurrence. Typically traditional stocks move only around 1 per cent on a day, not 750 per cent and this is not even the end of it. People on the Reddit page WallStreetBets believe that there are still more stocks to target and that AMC could still run up even higher. For anyone wanting to try trading for themselves, download WealthSimpleTrade on your phones app store and when signing up use promo code 702YGG to get an extra $10 to trade. However, remember the importance of doing your own research before investing and that this article is for education not financial advice.