Attack on Wall Street: the rise of the retail investor

The pandemic has managed to change many aspects of life, especially economically. Once the World Health Organisation declared the pandemic, stock markets around the globe crashed, creating what many people saw as an opportunity to jump into stocks for low prices, resulting in a rise in the number of users joining the craze of retail investing.

This craze is hitting its peak following the ‘WallStreetBets’ (WSB) hype of Game Stop (GME) stock. ‘WallStreetBets’ are notorious on Twitter and Reddit, known for hyping up stocks and creating a “pump and dump” phenomenon that could become unsustainable for the financial market, especially in these uncertain times.

There has been a significant spike during the GME craze. Some brokers reported a rise of 170% in applicants. Consequently, some brokers, including Robin Hood and Trading 212, refused to accept additional clients due to the abundance of applicants. To put this into perspective, Piper Sandler (leading investment bank) reported that in 2019 there were seven billion traders, 2020, 10.9bn, in 2021, there are now 14.7bn investors. The number of investors will be due to traders having multiple accounts on separate platforms.

A factor in this rise is most likely due to the increase in office-goers working from home, giving people more free time to research stocks before investing. This is predicted to increase after the stimulus package passed in the US Senate on 6th March 2021. This package is to fund lower earners of the country with $1,400 directly to their bank accounts to improve America’s economic outlook.

As 2020 rolled into 2021, Game Stop, which was facing a financial crisis, gained the attention of WSB. At the beginning of 2021, the value of its shares was under $20. By January 26th, their stock levels broke seemingly impossible boundaries, rising as high as $350. The stock then plummeted to around $40. Today, it sits at just under $200. This dramatic fluctuation has enticed investors into buying more stocks every time stocks drop. This hype has led to Game Stop stocks becoming a continuous money-maker for the average retail investor.  

The high-risk, high reward that comes with trading has attracted many young people during the pandemic. In some cases, the younger generation has found itself with surplus funds due to a lack of socialising, music events, and gambling on sporting events. Gambling on hype stocks has provided them with a new way to get an adrenaline buzz and proved to be just as addictive.

Tobias Levkovich, a Citi chief US Equity Strategist, told CNBC: “New investors sense a generational-buying moment but do not have much background in the equity space”, stressing the need for experience and knowledge in the stock market. Without this, data states that 90% of retail investors lose money. Levkovich continued: “We have heard anecdotally about younger individuals with less market experience viewing the March [2020] plunge as a unique time to start portfolios.”

Signing up to a broker has never been so easy. The accessibility of the market has been the driving force behind today’s leviathan number of investors. Trading sights are accessible on any smartphone. Social media is now flooded with stock “influencers,” claiming to be knowledgeable in the market. The inexperienced traders rely on influencers to make their investment decisions. These influencers use platforms such as YouTube, Reddit, Twitter, Discord, and Patreon. While many offer their advice for free, some influencers are now charging a fee to follow their buying patterns, sales, and other “exclusive content”.

As of March 2021, ‘WallStreetBets’ currently have a total of 9.6 million subscribers on Reddit. The platform discusses stocks 24/7 whilst creating a community to exploit weaknesses within the market. Exactly how GME’s stock price exploded in late January 2021. A culmination of traders pumping stocks in unison, driving prices up at an incredible pace.

A lot of money was lost by investors, even so-called ‘professional traders,’ through the process of shorting stocks that were expected to devalue but alternatively rocketed in price, such as Game Stop. There have been some positives to emanate from those who have cashed in on investments. Some charitable profiters who refer to themselves as “gorillas”, “apes”, and “diamond hands” have been donating to gorilla conservation charities in regions of Africa, offsetting some of their profits.

Now for those of you who have never heard of the term “shorting a stock” (disclaimer: I am no professional). The process is where brokers lend stocks to a short seller, with the shorter predicting that they would decline. Once a drop occurs, the short seller would repurchase the share at a lower price and return it to the broker, making a profit. (Click here or a more in-depth explanation on this through a conversation between YouTuber Tom Nash and Patrick Boyle, hedge fund manager and professor at Kings College London.) When “shorting a stock” is not in play, the major players in the trading world have a lot to lose.

Hedge funders involved in the Game Stop pump have been left with extreme financial losses resulting in bailouts. One case required $2.75 billion to hedge fund short-seller Melvin Capital from fellow hedge fund stock shorter Ken Griffin.

In a “David vs Goliath” type standoff between social media stock pumpers and stock shorting hedge funders, “David” is in some ways winning thus far. With hedge funders bailed out with such large sums of money with the confidence, Melvin Capital will return it in the future. The looming question is how long can this go on before rules and regulations get introduced to prevent the situation from reoccurring?