Should I Be Concerned With My Stock Market Investment? What about the Reddit Users and GameStop?
Just over a month ago, the video game retailer GameStop seemed to be on its way out. But they went from rock bottom to a value of over $21 billion—all in a matter of days.
While sales for the brick-and-mortar chain have declined, their stock soared over 1,500% in late January, topping at about $480 per share. It all started on the Reddit forum WallStreetBets, where an army of mostly amateur traders helped drive a meteoric rise in GameStop's stock. Some traders may have cashed in high rewards, but it also caused a frenzy on Wall Street, with a forced halt in trading and a loss for the short-sellers who banked on the stock falling. This fleeting David vs. Goliath story has now come to an end, with the stock residing back to under $50 per share. Despite the stock market's reputation for unpredictability, the GameStop saga proved itself to be especially volatile.
There is a growing concern amongst investors whether a stock market crash similar to the dot-com crash of 2000 is on the horizon. If you're feeling anxious about what's coming next for the stock market—and how it might impact your nest egg or your 401(k)—you're not alone. Here's what this event can tell us about how the landscape is changing and what it could mean for the future of stock market investment.
Redditors vs. Wall Street: What Happened With GameStop?
GameStop is a national video game chain where customers can buy, sell, and trade items like games, consoles, and accessories. Not only have their sales been down due to the decline of physical shopping centers and malls, but the pandemic has had a devastating impact on retailers.
Reddit users on the subreddit WallStreetBets discovered that Melvin Capital (a hedge fund) was buying a lump sum of "short" stocks in GameStop, betting on the share prices going down. On this subreddit, a group of traders conspired to buy as much GameStop stock as possible to make the price rise, leading to the massive spike seen in late January.
Should I Be Concerned With My Stock Market Investments?
The GameStop incident shook the foundation of Wall Street. However, its lasting impacts are unlikely to affect your retirement fund. The typical retirement fund is spread across various financial markets—including stocks, bonds, commodities, and real estate.
Furthermore, while GameStop may have sparked a crisis, a handful of stocks are not going to have a significant impact on the stock market as a whole. Events like these might discourage people from investing, but experts have assured the public that the overall market remains healthy. If anything, the GameStock surge can serve as a costly financial lesson for hedge funds. Individual investors can still expect to see some success or at least more stability for their long-term portfolios.
How Can I Protect My Investments?
To some extent, the stock market will always be volatile and unpredictable. While there might not be a repeat squeeze from Reddit users, it's essential to be prepared to handle anything the market has to offer.
Come Up With a Plan
Regardless of what the future holds for the stock market, preparation is an excellent strategy. Create a well-thought-out plan that anticipates potential volatility and focuses on diversifying your investments.
During GameStop's sudden rise, many traders made the mistake of being reactive instead of proactive. It might seem tempting to jump onto trending stocks, but reacting too quickly and without a proper plan could backfire on you. Instead, try to be proactive about your stocks. Stay aware and on top of the market's fluctuations, but don't act without a solid plan. Be honest with yourself about how much risk you're prepared to take on.
What Comes Next for the Stock Market?
While the stock market isn't heading for another bubble, experts point to the Reddit-fueled squeeze as evidence that the system is evolving.
Reddit users may not have wholly overturned Wall Street, but the incident may have a long-lasting impact on how the market operates. More importantly, it signals a shift in who controls the market. Smartphones allow individual investors to have the stock market at their fingertips. Cheap and free trading apps are more available than ever, with the popular app Robinhood seeing more than 3 million downloads in January, its highest on record.
People are also more likely to enter the market after seeing friends, family, or public figures talk about their stock market investments on social media. Especially with the social media frenzy in the aftermath of GameStop, more people are investing than ever. All these events propelled the GameStop surge, but they could lead to many more.
Decrease in Shorting
The hedge funds that shorted—or bet against—GameStop stock suffered massive losses in January. This setback might lead to investors feeling more cautious about shorting in the future. Less shorting could have an impact on the market. While there isn't a bubble on the near horizon, swells may be more likely to occur without short sellers to balance out investments on an individual stock.
The Bottom Line
Despite the shift towards more democratic investing, this volatile shift in GameStop stock might seem more anxiety-inducing than revolutionary. But just because there's risk involved doesn't mean it's not safe to invest. By focusing on well-diversified funds and putting together a long-term investment plan, you won't be at the mercy of the ups and downs of the stock market.
At Park Place Financial, we can help you put together a solid investment plan to survive even the most unexpected turns in the stock market. Explore our investment planning guide or schedule a complimentary financial review today.