Stock Trading in a Social Media World
By now, you have likely heard about the unusual activity in the stock market relating to GameStop, Robinhood, and the small group of investors looking to exact revenge on large institutional traders and hedge funds. Those events certainly caused us to have several conversations with clients about the trading irregularities — mostly as a point of curiosity but some voiced real concern about how this could positively or negatively impact their investments in the future if the trend continues or even grows.
As a refresher, the stocks impacted included names like GameStop, AMC, Blackberry, and some others. Each stock had a common characteristic as being a struggling company with a large number of investors selling the stock short. Shorting a stock means opening a position by borrowing shares that you don't own, and then selling them to another investor. Shorting, or selling short, is a bearish stock position most often taken when an investor feels strongly that the share price is going to decline.
In the case of GameStop, a group of small investors on Reddit, a social news aggregation platform, banded together to combat the professional investors who had the ‘short’ positions on the stocks. By purchasing the stocks, these Reddit investors caused it to rise in value. As momentum gained, and institutional buyers also joined in, the price of the stocks grew higher (GameStop stock rose 1,640% in just a few days). This upward movement caused the short-sellers to cover their positions by buying the stock, which made the price go up even more.
While the story of these stock’s volatility isn’t over, it appears many who bought in could sustain heavy losses. Regardless of the individual stock outcomes, the activity has caused conversations to be had regarding the lack of safeguards in place for novice investors. Hopefully, it also provides a lesson to those hoping to make a very fast dollar.
Additionally, this occurrence ignited some conversations internally with the Slaughter Associates investment committee as well as with many of our clients. Mostly, our internal discussions focused on the impact the trading volatility could have on the market as a whole or upon individual holdings within our client portfolios. We quickly concluded that the broader market would likely not see long-term price instability. The stocks that were targeted carried very little weight with market indexes and were generally not of the fundamental quality that we look for in investments for our clients.
We did conclude, however, that if one of our stocks reacted with significant upward movement because of the trading phenomenon, we would likely move out, capture the gain, and avoid the inevitable move downward.
Slaughter Associates’ primary service is to provide our clients with wealth management based on clearly understanding your family’s financial needs and goals, including the risk and return requirement of your investment portfolio under our care. A central characteristic of our investment strategy is the utilization of quality investments chosen for their likelihood of appreciation with reasonable risk. The stocks that got caught up in the Reddit group plan did not meet our standards.