At the beginning of the year, the stock market became a hot topic when recognizable brands including Robinhood, GameStop and AMC Theaters were making headlines. Many news outlets vaguely covered the current trends but didn’t directly explain how any of the news related back to the everyday consumer. That’s why Elements Wealth Management is here to break the situation down.
The Basics
The stock market is the collection of publicly traded stocks or shares in a publicly held company. Stocks are bought, sold, and traded for money and represent ownership claims in a business; the more you own, the more of an ownership claim you have.
If the stock market is public then who controls the pricing? Fundamentally, stock prices are controlled by supply and demand. The prices of stocks are determined by how well the company is doing in the current economy. Yet, this does not mean the market is immune to manipulation. Businesses known as hedge funds operate on the means of buying and selling stock to produce a greater profit for clientele and themselves.
What recent events have happened?
134% Peak Stock Increase of GameStop
Recently, companies like GameStop have been in the news for their sudden surge in stock prices. This situation occurred when a Sub-Reddit group noticed a large flood of GameStop shares entering the market and bought them all up. The stock had been shorted 150%, meaning that half of the available stock had been borrowed twice. The price of the stock increased from $17 to $400 in just a matter of days. Therefore, the hedge funds were scrambling to make up for lost profit.
How did this happen?
Hedge funds are pools of wealthy investors who seek to increase profit from investment portfolios of clients. In these cases, profit is made is by protecting investors from market uncertainty. The tactics hedge funds use, including long/short equity, event driven, and short only, can have mixed effects on the market.
With a strategy like short only, the chances of failure are high, but a large payout is the reward. Shorting is when investors borrow a stock that is predicted to drop in price, sell that stock at current market price and buy that stock back at lower market prices. This strategy ultimately creates a profit for the fund while leaving a hole in the pockets of buyers.
In the case of GameStop, however, the stock prices skyrocketed. Buyers refused to sell the stock and investors were left scrambling to make up for lost income. Investing apps, including Robinhood, who didn't have enough money to pay out on contracts began to restrict buying of the stock. This caused major distrust in investing apps because of their affiliation with funds like Cintron and Melvin Capital.
What can investors learn from this?
As an investor you may ask “Is buying stocks from apps safe?” Despite current public perception of apps like Robinhood and Cash App Stocks, there are many beneficial elements to in app investing.
Using investing apps is easy, but there is a dark side to it as well. It does not give trusted financial advice and you can easily make money just as fast as you can lose it.
Making large financial decisions without expert guidance can come at a cost. With investing apps, that cost is the risk of losing out on investments because of a volatile market or making uninformed rash decisions as the market fluctuates.
Investing can be a large commitment and requires consumers to pay attention to current market trends. If you're looking to get started investing, contacting a trusted financial advisor is a great first step. Financial advisors are able to provide objective viewpoints and assist you in weighing your investment options to fit your long-term objectives. With more than a dozen LPL Financial Advisors at Elements Wealth Management, we’re committed to providing education and helping balance your goals with current market trends.
Explore our site further to find contact info, bios, credentials, and specialties of each of our LPL Financial Advisors.