The trading world was in a tizzy recently over GameStop, of all things. Why? To cut to the chase we’ll say it had a lot to do with short selling “nostalgia stocks”, Robinhood Financial, and an army of Redditers.
Millennials grew up with GameStop, a video game buyer and seller. It was a staple for many gamers in their younger years, and has slowly been tanking over time. For lack of better words it’s a perfect target for hedge funds to “short sell” and make a profit.
What is Short Selling?
To short a stock is part gamble part intuition. Here is the process:
- Bet a stock will fall.
- Borrow shares from a broker and sell them immediately.
- Read a magazine. Bake a cake.
- When the stock price finally falls, buy the shares back and return them to the broker.
- Pocket the profit.
However, here’s the thing. If a stock is $10 one day, then $400 the next, the short sell tactic has gone out the window for a hedge fund. It’s a lot of fun until it’s not anymore.
What Happened to the GameStop Stocks?
We’ll try to keep things snappy. Reddit is a decade old, anonymous, talk site. A first time site visitor might scroll through and find the platform to be unattractive and antiquated. What many don’t realize is Reddit is a knowledgeable, loquacious community. Minutes could turn into hours on such a platform, as many golden nuggets are riddled throughout.
This is where we introduce Wall Street Bets. A subreddit, or talk chain, where commenters divulge their investment secrets and exploitations. These young investors paved their own way and “cyber bulled” stocks of their choosing. They bought GameStop stock to raise their prices just to give hedge funds a swift kick in the knee cap. To put it simply, the average consumer made a profit while hedge fund managers and brokers scrambled to put an end to it.
As if on cue, Robinhood Financial and other such brokers temporarily restricted retail investors from trading a handful of stocks. However, hedge funds and institutional investors were allowed to resume business as usual.
This is a big ouch and somewhat of an eye opener for those investing solely through Robinhood Financial and similar brokers. The reputation of these brokers took a major hit because of the GameStop situation.
Should My 401(k) or IRA be Worried for Similar Situations in the Future?
After all of the hullabaloo went down, retirement account enrollees scratched their heads wondering, “Will this affect my 401(k)?” This drama occurred over the course of a week, and already it’s turning into old news. Those who were truly affected felt the pain of selling back their shares at a higher price.
This is also where the importance of a diversified portfolio comes in. If a well diversified portfolio also appropriately reflects an investors goals, a repeat situation with similar stakes should not affect a 401(k) or an IRA.
What 401(k)s learned after this calamity is to remain well diversified. What the investment world learned was if a mass amount of people stick to an agenda, they can influence prices of stocks and create pain for hedge funds.
The trading world is a volatile one. A stock’s true value is not measured by quick bucks and media exposure. It’s measured by longevity. Your investment portfolio performs at its best when it is diversified. So remember, quarterly rebalance could go a long way and possibly save you from similar pains of our aforementioned hedge funds.