By Lazetta Rainey Braxton, MBA, CFP® and Rianka R. Dorsainvil, CFP®
When the GameStop short-squeeze event took over Wall Street last week, people were all ears. Here was a Reddit-fueled market surge, led by everyday people.
While it was exciting to watch, and interesting to analyze, we must understand what happened, and why it happened, so we can understand how we should use it to our advantage.
The Game, Explained.
This event was a short-lived market manipulation, where several amateur day-traders coordinated to quickly drive up stock prices and “stick it to the man.”
Hedge funds who had taken big bets that certain stocks would crash (called shorting the stocks), including GameStop, would be forced to pay up large sums if the price climbed instead. CNN has a great explainer article on what has since been dubbed the “Reddit Rebellion.”
We saw some frenetic market activity during the last week of January, where some people who were paying close attention to stock price fluctuations did make a lot of money… but only if they knew when to sell. Hedge funds were in an uproar and many tuned into movies like ‘The Big Short’ to understand what the heck was actually happening.
Who Played Their Hand Well?
Most investors who were used to speculative trading, where the potential and risk of making large sums of money are high, could appreciate what was happening with GameStop.
Knowing when to buy, hold and sell was and is a critical factor. Those that sunk large sums of money into GameStop they weren’t prepared to lose, could be in for a world of hurt if they don’t sell in enough time.
For investors who considered the event a gamble, and were prepared to lose the money, it was a fun exercise in the power of free markets, and they perhaps pocketed some additional cash.
And there were certainly some winners that we loved to celebrate, like this ten-year old from San Antonio who made $3,200 from an initial investment of $60 his mother bought him in 2019, and reinvested some of it again. Bravo!
Good amateur investors know a little something about the company they are buying into, and understand the risks associated.
Ready to Place Your Bets?
If we consider GameStop a catalyst to drive interest in investing, that’s a great thing. But, we need to understand that this event was an anomaly, and should not be expected on a normal day.
GameStop was not an investment strategy; it was a gambling strategy. Investors who believe they can secure their retirement nest egg by engaging in speculative investing behavior set themselves up for a rude awakening.
When considering buying individual stocks as investments, we encourage you to lean into these everyday principles:
Be willing to lose money, particularly if you are only holding a few stocks and if you participate in event-driven markets
Read up on the companies you are going to invest in
Understand and appreciate the power of pooling money
Plan for the long game
Understand the tax implications of buying and selling stocks
Just remember, when gambling, the house always wins.