Millennials and Gen-Zers are finding a new career—trading stocks online. The pandemic has caused people to lose their jobs or work from home. College students had their in-class lectures canceled and were forced to learn over Zoom calls made by professors who lack proficiency in the technology they use.
One of the quirky results of millions of people staying at home all day long is the fast-growing emergence of young, novice “investors” trading stocks online. Many have flocked to Robinhood, a trading app that’s built like a video game. I’ve opened an account and bought stocks. The experience is much more user-friendly and fun compared to my stodgy Charles Schwab and Vanguard mutual funds accounts.
The prevailing investment style of the predominantly Gen-Z and Millennials is to buy momentum stocks. This entails finding a fast-moving stock and jumping on the bandwagon. The key is to pop off before the stock falls. It’s like picking up dollar bills in front of a moving steamroller. You can scoop up a lot of money, but if you make one misstep, you’ll be run over and squished like a bug.
For the most part, the novice investors are fearless. Why shouldn’t they be? From the March Covid-19 lows, the stock market has rebounded about 70%. All they know is that “stocks always go up.” Scores of newly minted, self-taught traders are buying stocks and quickly selling to lock in profits and collaborate with each other on sites, such as Reddit, TikTok and Discord.
However, there is a dark side to this. A young man in his 20s thought he lost about $700,000 on Robinhood and killed himself over it. This brought up concerns over the potential lack of compliance and regulation at brokerage firms that cater to active novice traders. There’s also the question of whether the active traders are colluding together, in what used to be called a “pump-and-dump” scheme.
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According to their self-reported results, it looks like the amateur traders are handily beating the pros and taking great delight in that fact. The investment strategy is simple and straightforward: “respect the pump” or “I see a stock going up and I buy it. Then, I watch it until it stops going up and I sell it.” Old-fashioned concepts like studying balance sheets, profit and loss statements and researching price-to-earnings ratios are ignored.
A large segment of the active traders dispense with purchasing shares and buy cheap, risky out-of-the-money calls, which offers them significantly more leverage and outsized gains. WallStreetBets is the go-to subreddit for people interested in the rush of trading and the camaraderie of fun-loving, goofy, foul-mouthed and self-deprecating colleagues. Their buying frenzy of GameStop stock and call options offers a window into their activities.
GameStop is a brick-and-mortar chain that sells video games. Its business model, especially during the pandemic, appears antiquated and incapable of competing against its internet-based rivals. Similar to the fates of other iconic retailers, over the last number of years, GameStop had to close stores, lay off workers and its stock price plummeted.
Traditional Wall Street sharks and short-sellers (an investment style in which you profit when stocks go down) smelled blood in the water and shorted GameStop stock. When this happens, investors borrow stock at the current price, sell it and then hope to buy it back at a much cheaper price. The difference is their profit. It’s the direct opposite of buying a stock and hoping it goes up.
The experienced Wall Street pros were unexpectedly blindsided. Ryan Cohen, the founder of the successful pet supplies site, Chewy.com, saw an opportunity for GameStop to go all-in on e-commerce online, bought a boatload of stock and joined the company’s board of directors. Cohen’s star quality and association with the company sent the stock higher. This forced the short seller to “cover” their positions, as the stock price raced upward and they were losing money.
The army of young WallStreetBets members had bought big amounts of GameStop stock. The wave of buying caused a short squeeze—as short sellers needed to buy back stock to stem their increasing losses. The additional buying by the Wall Street professionals sent the stock soaring.
Redditors giddily celebrated their victory over the professionals with emojis and trash-talking. Many showed screenshots of the money they made of their trades. Some have claimed hundreds of thousands of dollars or over a million in quick gains. These numbers could be real, inflated or fictitious.
It will be interesting to see how long this trend continues. In past bull markets, we’ve seen regular everyday people become day traders. It lasted until the market corrected or crashed.
On Reddit, a thread started with the question, “Is the fact that there are now countless ‘TikTok influencers’ giving stock advice a concern for anyone else?” The Redditor added, “As the saying goes, ‘be fearful when others are greedy and greedy when others are fearful.’”
He forewarns, “TikTok now contains hundreds of accounts of kids giving advice on trading, really leaning toward getting out of the market for a while. This feels like the epitome of the shoeshine boy giving stock advice.”
This refers to the story of Joe Kennedy, the father of President John F. Kennedy and shrewd Wall Street investor known for his questionable practices. He famously got out of the stock market just before the Great Depression and stock market crash when the kid who shined his shoes started giving the elder Kennedy stock tips. He figured if even a shoeshine boy was into the stock market, everyone else was too and there was nowhere for it go, but down.