Users of a popular Reddit message board have effectively hamstrung Wall Street. Many have likened their push to punish multibillion-dollar hedge funds to a David-versus-Goliath struggle. Short sellers expecting to make money off the failure of struggling companies such as GameStop, which is headquartered in Grapevine, are now suffering as its stock price soars. All while the little guys rake in mountains of green.
But not all that glitters is gold, said Shane Goodwin, a finance professor and associate dean at the Cox School of Business at Southern Methodist University.
“I think there are going to be some stories where people are going to be bragging about how it worked out for them,” Goodwin said. “But there will be, unfortunately, a lot of stories about those that it did not work well for.”
As the internet pushes retailers online, brick and mortar establishments such as GameStop and AMC Theatres have been struggling to keep the lights on. With a raging pandemic and widespread economic hardship, much of the internet proletariat is in a similar spot. So, the WallStreetBets Reddit forum figured: Why not launch a targeted campaign to boost those stocks — all while turning a profit?
One reason is that the underlying conditions that have dragged down the companies' stock prices haven't changed simply because a group of small investors online have traded up the prices. When that reality sets in, someone is going to be left holding the bag. GameStop stock was trading at $17.25 a share on Jan. 4. The price peaked at $413.98 this month, and the stock closed Monday at $225.
Goodwin said he’s happy to see more people express interest in finance, but some may wind up shelling out their life’s savings just because they have a fear of missing out. Although many will undoubtedly make a handsome sum, the last to leave will have the most to lose.
There have been other examples of this type of feverish market activity throughout history, Goodwin said. “Tulip mania” took over Holland in 1636, a year when some Dutch traders spent a whole year’s salary on uncommon bulbs, according to History.com.
As with the flower frenzy, though, Goodwin said GameStop’s bubble will likely soon burst.
“There’s a lot more to it than just, ‘GameStop all of a sudden has hot stock again because the business is good,’” Goodwin said. “I would argue that it’s not.”
Another company is poised to lose from the whole ordeal: free-trade investing app Robinhood. Its decision last week to temporarily prevent users from buying GameStop stock — while still allowing them to sell — prompted many to accuse the organization of betraying its mythical namesake.
Following the move, Dallas architectural designer Julio Roman decided to ditch the app. He said if Robinhood really cared about its users, it also would have stopped their ability to sell. Instead, its purchasing halt only benefits the larger investors such as hedge funds.
Roman said he initially had stock in GameStop and AMC, but he decided to sell his shares before the bubble pops; the longer one waits, the riskier it gets.
Even though he escaped unscathed, he said Robinhood’s actions have made him decide to close his account.
“If they have the power and they’re willing to do that at this point, then you just don’t know when they could do it again,” Roman said.
“You could potentially lose everything and they’re well within their rights as a private company to do so,” he continued. “So in my opinion, it’s demeaning for them thinking that they have to babysit the regular investor and secondly, it’s a break of trust.”
Meanwhile, hell reported record-low temperatures on Thursday as Texas Sen. Ted Cruz concurred with his Democratic nemesis, U.S. Rep. Alexandria Ocasio-Cortez.
The senator replied “fully agree” to a tweet from Ocasio-Cortez in which she called for a congressional hearing on Robinhood’s decision to block retail investors from making GameStop purchases.
She wasn’t having it.
“I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out,” Ocasio-Cortez shot back, adding she’d be happy to work with other lawmakers who didn’t try to “get [her] killed” during the U.S. Capitol siege.
I am happy to work with Republicans on this issue where there’s common ground, but you almost had me murdered 3 weeks ago so you can sit this one out.— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
Happy to work w/ almost any other GOP that aren’t trying to get me killed.
In the meantime if you want to help, you can resign. https://t.co/4mVREbaqqm
Goodwin said lawmakers shouldn’t put their thumbs on the scales of the free market; it works best when prices are set through price discovery. Even legislators who may be trying to help save the little guy from himself could end up hurting more people in the end, he said.
“You can’t protect people and say you’re smarter than them, they don’t know what they’re doing and they’re not allowed to do it,” Goodwin said.
Roman said politicians shouldn’t jump the gun on setting regulations because they could potentially slash people’s opportunities to earn extra money. While Congress bickers over stimulus check amounts, many Americans are depending on stock market gains.
If politicians don’t want to help, they should get out of the free market’s way, he said.
“I would just be really careful before any regulations were set," Roman said, "because you could potentially cut the opportunity of millions of people to be able to have another source of income, especially during a pandemic."
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