The stock market is known for periods of intense volatility, but investors are still trying to make sense of the GameStop (NYSE:GME) short squeeze last month. Long story short, members of the Reddit community r/WallStreetBets joined forces to increase the value of GME stock. This came in response to Wall Street firms that decided to bet against the company. The retail investors were successful in their endeavor pushing shares of the company over 1000%.
Although the rally cooled down since then, the incident has changed the investing game for good. Here’s a look at what’s next for GameStop and the future of retail investing.
The GME Stock Saga Goes to Court
Repercussions of the trading frenzy that continue to reverberate across the investing community are making their way to The Hill. Chief executives of the companies involved along with Reddit star Roaring Kitty will be testifying in front of Congress. Although GameStop’s stock movements were well documented during the “squeeze,” there’s a lot we still don’t know about how the situation came to be. The hearing will help shed some light on this while ensuring there are checks in place to avoid a repeat.
Amidst the buying frenzy, trading platform Robinhood decided to restrict trades on its platform. Vlad Tenev, CEO of Robinhood, cited increased capital requirements as the major cause, but this did little to stop the intense backlash from retail investors online. Tenev admits the restrictions could have been communicated better but denies all claims of conspiring with hedge funds to limit trades. Needless to say, Robinhood has a lot riding on this testimony– especially since the company is expected to go public later this year.
In addition to execs at the various entities involved, Keith Gill, aka Roaring Kitty of Reddit, will also be testifying. Many credit Gill as being the mastermind behind the short squeeze and the spark that lit the GME rally. While lauded as a star among his peers on Reddit, the trader is being sued for securities fraud. A class-action lawsuit filed on Wednesday accuses Gill of posing as a novice investor while working as a licensed professional at MassMutual. Gill denies all allegations stating he was acting in his own interest and did not solicit information from any parties.
The testimonies will help paint a clearer picture of how the GME stock rally went down. At the same time, it will give authorities greater insight on how to prevent “bubbles” that make trading less efficient.
Changing The Investing Game For Good
The battle between retail investors and Wall Street hedge funds is a tale as old time. But the sheer scale and speed of the GME stock rally is definitely a novelty. This phenomenon was largely the result of an influx of trading platforms that have made investing easier than ever. Today, anyone with access to some cash and a smartphone can initiate trades.
Adding to this is the growing power of social media in the investing community. Tweets or comments by influential figures can take a stock’s value soaring, as we saw with GameStop and AMC (NYSE:AMC). The so-called “hot stocks” are taking center stage although many have little to no long-term value. This goes against the very premise of good investing
So what do these trends mean for the future of investing? At the onset, we are likely to see more people investing their money in stocks. In January, Robinhood saw more than 3 million downloads on its platform. More investing is definitely a good thing, but chasing social media stocks for short-term gains is going against the book. For most people, real investment value derives from holding stocks for an extended period of time.
On the flip side, it’s also worth considering the intentions of hedge funds when it comes to short selling. Melvin Capital, one of the entities that bet against GameStop, lost 53% of its portfolio value when the investor overhaul shot up the stock’s price.
Surya Chelikani, Associate Professor of Finance at Quinnipiac University, said in an email to InvestorPlace, “in the present situation, wildcat traders are challenging the traditional setup,” and he points out that it “would be ironic for Wall Street to ask for intervention when their long held position was deregulation of markets.”
Looking ahead, hedge funds and financial entities will exercise greater caution before they short-sell a stock. This could help democratize the financial markets and level the playing field.
The Bottom Line on GME Stock
The GameStop rally is old news by now, but there’s no doubt that it will leave a lasting impact on retail investing and the actions of large brokerage firms. There will be a lot to unpack in the upcoming hearings as we watch the saga unfold.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.
