For a very long time, retail investors were mostly ignored in the stock market. Their contributions did little to make a stock go up or down. This began to change with the rise of online apps, like Robinhood, that made it easier for retail investors to understand the stock market. As small investors became more financially literate and vocal on the internet, they began to share information on which stocks would be best to buy.
What is shorting stocks?
Before we get into how social media can impact where people put their money, let's discuss a few key terms. First, what does it mean to short a stock? Shorting is when you borrow a stock, sell the stock, and then buy it to return it to the lender. If the price went down since you borrowed the stock, you could keep the difference. In essence, you are betting that the stock will continue to drop.
How does Wall Street use shorting in the stock market?
An example of shorting stocks is when many large investors shorted AMC and GameStop. Accordingly, to investing principles, the bet that these stocks would decrease made logical sense. With GameStop's retail presence dropping consistently and the decrease in movie-going habits due to the outbreak of the pandemic, the market would expect both companies to be impacted negatively in terms of financial performance. On December 8th, 2020, GameStop's stock plummeted, encouraging more investors to short it.
With that decision, a group of investors who believed shorting a stock to be unethical, met on a social media page on Reddit called Wall Street Bets and decided to do something about it.
How has social media impacted where people put their money?
The combination of apps where small investors could invest in the market like Robinhood and social media sites where people come to share ideas around what stocks to buy, such as Wall Street Bets, Public, and JoinCommonStock, has continued to grow and has disrupted the way that Wall Street does business.
In the example above, many large Hedge funds had shorted positions in GameStop and AMC. As a result, small investors leveraged an opportunity with social media by talking to each other to fight back against the shorting efforts of large hedge fund managers. In buying large amounts of GameStop and AMC stock, they defied ‘typical’ investing logic and artificially inflated the share price for AMC and GameStop, causing stocks to surge by nearly 50% at one point. As the investors all bought stock, the stock price of AMC and GameStop artificially began to climb inside a bubble hurting people who had shorted the stock financially. By increasing the value of the stock, the investors who shorted the stock now had to pay the new price, which was much higher.
Wall Street Bets, and the ability of those investors to drive the increase in share price of GameStop and AMC are not the only way social media affects the stock market. Something similar happened with Elon Musk. Many people follow him on various social media platforms. His backing of Bitcoin and dogecoin caused those virtual currencies to rise by 20% in just one day; some investors stopped doing independent research and turned to Reddit or Twitter to discover where to invest next. This led to social media having extraordinary power over the stock market. It also allowed influencers to inflate stock prices artificially and then get out before the price dropped.
What are the positives and negatives of social media investing?
Despite the losses that some investors incurred, there is a positive side to social media investing. More people than ever feel empowered to invest in the stock market, and the ability to monitor stock performance is increasingly becoming more accessible.
Every upside, however, has a downside. It is effortless to create stock bubbles on social media, like GameStop, and when that bubble pops, this can destroy small investors. Another downside is the assumption that everyone's perspective is vetted equally and is data backed. Social media can make us forget that just because someone is an influencer we admire doesn't make them an experts on stocks.
In short, investing is both an art and a science; we should be looking to understand what we are investing in and how we expect it to perform. Following the investment strategy of others can lead to the creation of an investment strategy that is inconsistent with your financial goals and potentially more or less risky than one might bargain for.
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