If you haven't been living alone on an island for the past month, you've no doubt heard about the wild situation with shares of GameStop (GME) stock. GameStop Corp. is a gaming merchandise seller that also offers consumer electronics and video game products. In early January, an online social media group of amateur investors coordinated their efforts and drove the share price of GME up 2,300 percent within a week. Wall Street firms, major banks, and several national governments were beside themselves with this demonstration of the power of ordinary, non-elite traders. What did it all mean, and what lessons can we take from the event and the differing reactions to it? Here's a quick summary of pertinent facts about the GameStop situation.
Volatility Cuts Both Ways
The volatility of today's securities markets reveals the risk and advantages of short selling. But note that it's not just short sellers who get burned in highly volatile situations. Traditionalists who go long by purchasing shares they believe will rise in value are at risk from rapid price declines. That's because groups of traders can get together and cause rapid price rises just as easily as they can create devaluation. In the most recent event, it just so happened to be the short sellers who lost their fortunes. Who knows what the result will be in the next war between social investors and elite institutions, like hedge funds and banks.
Government Regulators are Coming
The battle that ensued between individuals on social trading sites and entrenched hedge funds was a massive one. Even though prices have reverted to their original levels for GME, many Wall Street trading firms, financial institutions, and hedge funds are soon aching for a rematch to occur. But this time the big players have the government on their side.
What might happen? With a new political team in the White House, and one that is not known to be friendly toward individual investors, it's possible we could be looking at new legislation that pounces on the ability of citizens to use social media to run securities prices up, down, or sideways. In political battles like these, the big institutions nearly always win out.
Business Leaders are Divided
Some of the world's most prominent business moguls are already taking sides in what is shaping up to be one of the most consequential financial battles of the century. Tesla's Elon Musk, known for his contrarian ways, has already shown support for those who bought GameStop shares when the hedge funds were shorting it. Notably, Musk is also a die-hard backer of cryptocurrency, having recently purchased $1.5 billion of Bitcoin.
Other corporate heads and big tech types have announced their desire to see punishment for the upstarts who represent dumb money. Who's who in the coming war? On one side are the populists, independent traders, social media users, free speech advocates, maverick billionaires, and supporters of cryptocurrency. On the other side, national governments bent on regulation of all markets and currencies, most big tech companies, hedge funds, large financial institutions, and the current U.S. administration.
Social Media is Changing Everything
Social media is no longer about trading photos of the kids on summer vacation and your recent trip to wine country. It took more than a decade to happen, but the many adults who use social accounts for business purposes have truly transformed the global economy in ways we never thought possible. In fact, we would probably have doubted the sanity of someone who predicted that a website that began as a glorified chat room might one day take down a major Wall Street hedge fund. But it happened. The key thing to remember is that this was just the initial barrage in a protracted engagement that will likely last for years.
Big Lesson: Diversify Your Holdings
There's at least one very clear lesson in all this chaos in that diversification is the key to riding out the coming political, economic, and social battles. Now is probably not the time to put all your eggs in one basket. This is true in the midst of any crisis but especially pertinent today. For decades, smart investors have included a wide variety of securities in their portfolios. That old-school wisdom can come in handy during some of the most volatile times in recent memory. The good news is that there are plenty of things to choose from, including corporate stocks, cryptocurrencies, CFDs (contracts for difference), ETFs (exchange traded funds), options, precious metals, futures, commodities, and more.