Certified Financial Planner David Elder, Vince’s personal Retirement Advisor, is back with him on CFO at Home. This time around they discuss the GameStop trading craze and what it means for the average investor, Efficient Markets, when shorting stocks can be bad for the stock market in general, and more.
- Key Takeaways
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- GameStop trading frenzy
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- A number of Hedge Funds were “shorting” GameStop stock
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- Shorting a stock is when you are loaned shares of stock by a brokerage company (with interest), you sell the stock, buy it back (hopefully at a lower price) in order to return the loaned shares. The difference between your sell and repurchase prices is your profit.
- Reddit users started buying significant numbers of shares of the stock, driving the price up. With the stock price started going up instead of down, the Hedge Funds started buying shares as well i order to limit their losses (a “Short Cover”)
- This same activity was also taking place with others stocks such as AMC Theatres
- S&P 500 started to drop during all of this, possibly driven by Hedge Funds selling shares in other stocks to raise money to buy GameStop stock and cover their Short positions.
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- Efficient Market Theory
- The theory that the collective intelligence of all investors is smarter than a single individual. If you just own the entire market you’ll benefit from that collective intelligence in a free sort of way
- While trading like what happened with GameStop may not be “efficient”, not only is it not necessarily bad for long-term investors, it could actually work in their favor.
- Market inefficiency creates opportunity for unique opportunities to make profits (arbitrage opportunities)
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- “Shorting Stocks” can be bad for the market - Shorting stocks can results in dips in the broad market that can panic individual investors into selling at the wrong time
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- Be careful in your consumption of financial media - Like any other media, their priority is to get viewers/readers, not to provide accurate unbiased information
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