Finance headlines have been buzzing in response to the GameStop stock surge last week. 

The surge was triggered by a group of amateur traders on Reddit who coordinated a plan to buy up GameStop stocks from some hedge funds that had been short-selling them. This caused the share prices to skyrocket. By Wednesday, the investors had pushed GameStop’s share price up from December’s close of $18 to more than $350. 

Hedge funds that had been short-selling GameStop were faced with major losses. In order to return the stocks to their owners, they had to buy them at the high price or suffer even more major losses. However, buying the shares back then created even more demand and the prices soared even higher. In an attempt to protect themselves and their clients some online broking platforms like Robinhood chose to restrict trade on GameStop, which helped bring the price down again.

Since then, GameStop’s prices have started to come back down. Although the Reddit traders are likely to lose some of their gains, it has sent a powerful message – Wall St might have the final say, but the hidden liquidity and leverage in the markets was exposed, and with it the power retail investors also can have.

As James Thompson wrote in the Financial Review, “Everyone acted in their own self-interest, some won, some lost and stabilisers in the plumbing of the market kicked in to ensure market stability – exactly as should happen.” 

A few years ago, you had to engage a broker in order to invest in the market. Now, with all the information available on the Internet, as well as trading apps, investing has opened up to more and more regular people.

Even though the GameStop frenzy happened on the other side of the pond, it has had its spillover effects on the ASX as low-cost, online trading platforms gain popularity among amateur Aussie investors.

“It… reflects the power of social trading, which refers to unmoderated investment advice provided via social platforms — such as the Reddit army in this case, investment channels on YouTube, share trading groups on Facebook, and influencers offering financial advice via TikTok,” RMIT University’s senior finance lecturer, Angel Zhong, told Motley Fool.

Similar to Robinhood, Australian equivalents of low-cost gamified trading platforms are now available to anyone with an internet connection who would like to invest. ASIC has raised some concerns about small investors getting in over their heads.

“Copy trading is offered by some of the platforms, which is a form of social trading, and similar to the way Reddit traders have bought up GameStop this time,” Angel Zhong said.

Zhong told Motley Fool that social and copy trading could trigger a short squeeze attack in Australia similar to what happened in America with GameStop.

“The GameStop Saga has also alarmed the short-sellers in Australia who may face a battle from retail investors,” she said.

If this story shows anything it’s that whether you’re a beginner or a professional trader, having the best support and technology is essential.

If you would like to learn more about options trading you can join our weekly trading think tank where professional traders Kieren Neeson and Tim Gilderdale debate the trades of the day, look at the different ways to trading the current market, and provide feedback and review attendees’ trades. These will be interactive sessions and there will be a live Q&A session at the end. Book your spot.

Past performance is not a reliable indicator of future performance. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

Any advice contained within this presentation is general advice and does not consider your objectives, financial situation or needs, and you should consider whether it’s appropriate for you. The information we are giving you is for educational purposes only.

Sources:

• Hedge funds and short-selling: How and why Gamestop shook the stock market
• GameStop won’t stop more bubbles building
• GameStop frenzy: 3 shorted ASX shares that could shoot up