When the clock ticked to midnight last 31 December, people across the world welcomed 2021 with all sorts of resolutions for the new year: perhaps keeping the healthy habits picked up during lockdown, or spending more time with friends and family once restrictions would lift.
It would be fair to say that only a small percentage was planning to learn more about stock markets, and even a smaller number to start investing their own money.
But in a fairly unexpected turn of events, users of a Reddit online forum fuelled a huge squeeze on short-sellers that made finance the hottest topic in the news, even on Vogue, with people watching 2015 film The Big Short to get a better idea of what was going on.
With shares in GameStop Corp (NYSE:GME), a troubled videogames retailer, skyrocketing more than 1,900% in the first four weeks of January, that may have been enough to gain wider interest for the story.
But what seemed to grab the attention of the man and woman in the street was that it was fuelled by a rebellious army of private investors, who went on a shopping spree to target oversized short positions taken by hedge funds against the retailer.
A short position is effectively borrowing shares in order to sell them immediately to someone else on the expectation that the stock will fall in value, allowing the trader to buy back the shares at a cheaper price, return them to the lender, and pocket the difference.
After an initial spike in GameStop’s share price, the saga continued unravelling for weeks, with hedge funds losing more than US$13bn, trading apps like Robinhood banning users from buying shares, Elon Musk chiming into the discussion, US regulators launching an enquiry and global indices fluctuating amid heightened volatility.
“I was completely new to it”
“I was completely new to it… To be honest I was never into it because I saw it as a sort of elitist old boy’s club. You had to have money or know somebody to have a shot there,” Michael, a 34-year-old salesperson from Tustin, California, told Proactive.
“We, the people can have an impact if we are willing to take the risk… And it felt really nice to be united against that Wallstreet club/machine despite losing [money].”
Michael downloaded and started using a trading app after reading the stories about GameStop.
To the moon everybody
Robinhood and other commission-free trading apps such as Webull and Fidelity in the US, and Freetrade, Trading 212 and eToro in the UK, experienced a huge boom in users in recent weeks as everyone seemed to want a piece of the GameStop action.
This was a further step up for a retail trading market that had been on a surge during 2020 as more people turned to investing and trading during the global lockdowns.
Robinhood saw a global 747% increase in downloads from the Apple Store between January 26 and 28, however it was forced to give ground to competitors after it said it had to halt trading in GME, AMC and half a dozen other stocks.
Users migrated to Fidelity Investments and Webull, whose downloads rocketed 1,411% and 1,528% respectively between January 27 and 29.
In the UK, Freetrade downloads jumped 287% in those same days, while eToro rocketed 197% between January 28 and 30 after Freetrade announced its FX Broker was no longer providing coverage to help sales of US stocks.
According to an FT report, retail trading as a share of overall US equity trading volumes climbed to over 20% in 2021, beating out hedge funds at just under 10% and mutual funds at around 6%.
By no means not all of them were seasoned investors; with 430mln monthly users, Reddit has turned into a fertile ground to attract the interest of newbie traders.
Although it’s clear that those who started the short squeeze know what they are talking about, many of the social media’s ‘lurkers’ may have been convinced by the constant chat about investing.
“The GameStop thing really inspired me to believe that any of us can play the game. Doesn’t matter your background, your ethnicity, your gender, your politics,” says Michael.
Bernhard Winkler, a 24-year-old student of Musical Engineering in Vienna, Austria, was another who was inspired to get into trading after reading the stories about WallStreetBets.
“I had zero experience with trading beforehand. I went into this as a gamble… But it sparked my interest for trading,” he told Proactive.
So far he is still in the red though he went in with money he could afford to lose.
“I had the plan to start crypto investing/trading since after the first bitcoin spike, but never actually got into it.
“If GME would not have happened I‘d probably still be procrastinating to get into it. It pushed me since it was so sudden and like a now-or-never thing.”
However, as much as it feels like a calculated bet, any experienced investor or financial expert will tell you it’s best to be cautious when starting off as a newbie investor.
“It’s really important not to chase after the hot stocks, instead If multiple investors are going after one particular investment, then they’re probably buying it at a price higher than it’s worth,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told Proactive.
“If you diversify your investments, you can spread and reduce that risk significantly and stand a chance of making much greater returns than if you had left your money in an account paying minimal interest.
“The most important lesson is don’t put all your eggs in one basket. To be well diversified you need a combination of eggs and baskets – which should be taken to mean sectors and geographies, not just individual companies.”