Angel Zhong (0433 810 413 or angel.zhong@rmit.edu.au)
Topics: retail investors, GameStop, Robinhood, social trading, Reddit, meme stocks, BNPL, buy now pay later, low-cost trading platforms
“Hedge funds have been shocked by the power of Robinhood traders on Reddit, the new generation of retail investor.
“Retails investors have gathered an army on Reddit via r/WallStreetBets to buy GameStop stocks since 22 January 2021. This has created a large surge in GameStop’s share price of more than 700% to 27 January, as well as a few other ‘Meme stocks’ such as AMC. A post on Reddit suggests they plan to ‘bankrupt institutional investors for dummies’.
“GameStop (GME) is a video game retailer company in the US and has been struggling financially with the rise of digital game downloads.
“GameStop had been short-sold heavily by hedge funds, for instance Melvin Capital, before the influx of Reddit retail traders.
“In financial markets, short-sell refers to a trading strategy undertaken by traders who expect the share price of a stock to fall in the near future.
“For instance, a trader forecasts a large drop in the share price of GameStop. This trader then borrows GameStop shares and sells the borrowed shares in the market. Given that the shares are borrowed, this trader has to buy them back later at an anticipated lower price to gain a profit --- sell high and buy low.
“In GameStop’s scenario, hedge funds borrowed the stocks to sell in anticipation of buying back at lower prices. However, retail traders increase the share price dramatically.
“The heavy buying pressure creates short squeeze, as short sellers need to cover their positions but at a more expensive price.
“Telsa CEO Elon Musk’s Twitter post has further fuelled this trading frenzy.
“The saga is related to the rapid rise of retail trading as a result of the COVID-19 lockdown. Since March 2020, share markets around the world witnessed the large influx of retail traders.
“It also reflects the power of social trading, which refers to unmoderated investment advice provided via social platforms, such as the Reddit army this time, investment YouTube channels, Facebook groups on share trading, and influencers offering financial advice via TikTok.
“In Australia, ASIC is concerned about social trading and has warned retail investors to be cautious about copy trading offered by low-cost trading platforms such as eToro.
“What are the hottest stocks among social traders in Australia as seen on Reddit and HotCopper? The BNPL (Buy now pay later) stocks are definitely among the hottest and the large surge in their price is partly related to retail trading.”
Angel Zhong is a Senior Lecturer in Finance in the School of Economics, Finance and Marketing at RMIT University. Her research focuses on investment and investor behaviour in share markets and corporate governance around the world.
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