After a tumultuous month for GameStop stocks — during which the seemingly nondescript game retailer’s stock price skyrocketed by over 1,000 per cent — investors, regulators, and even those unfamiliar with the stock market are pondering its long-term impacts.
As the stock price settles back down to below $100 USD, Canadian regulators have begun discussing regulatory action to protect investors in the future. Meanwhile, the frenzy has kindled the interest of many Canadian students to test the waters of investing.
The situation that led to the soaring stock price was highly unusual, which is why the eyes of the world are now, more than ever, glued to the stock market.
“The rise was absolutely insane, mind-boggling — very far outside of normal stock volatility,” wrote Ben Reeves, chief investment officer at Wealthsimple, a Canadian online investment management service. “The price went up because of a big group of what’s known as retail investors — normal civilians who buy and sell stocks as opposed to people who work for hedge funds or other financial companies and do it for a living.”
These retail investors, thousands of whom rallied on a popular subreddit called r/WallStreetBets, banded together beginning January 13 to buy large amounts of GameStop stocks and options at once.
In doing so, they were working against a class of investors known as “short sellers”, who make money by borrowing failing shares from their shareholders, selling them, and buying them back at a cheaper price. Recently, short sellers chose GameStop stocks as their target.
“GameStop is sort of a boring company, a video game retailer with a network of physical retail stores. Some hedge funds had taken positions on it that assumed it was overvalued,” explained Reeves in Wealthsimple Magazine. “If you borrow a share that’s worth $100 and you close the loan when it’s worth $50, you have made $50. These folks were essentially betting that the price would go down.”
This plan ultimately backfired. Investors on Reddit, and across the Internet, bought huge amounts of shares together, bolstering its value. Short sellers who had borrowed and resold the stock were still obligated to buy it back, at much higher prices. This caused them to lose massive amounts of money, and boost the stock’s price even more.
For those who see short selling as unfair or predatory, this was considered a huge win. Two professional investment firms were completely wiped out, and research firm S3 calculates that short sellers lost $5 billion on GameStop stocks.
However, as GameStop’s stock begins to drop back to normal, concerns are rising about ordinary people who may have been drawn in by the excitement and then found themselves playing with fire.
“GameStop made me realize how unpredictable the stock market is, and how it’s more like a game of chess, or flipping a coin,” says Omar Basheer, a second-year forensic science student at Ontario Tech University, who began exploring the stock market last summer.
“I feel like since the lockdown started, there are so many more new investors. It’s not hard to get into investing — all you need to do is make an account. I think the hard part is making money and doing it consistently.”
In this vein, major Canadian regulatory agencies are speaking out about protecting ordinary Canadian investors from potentially harmful trading activity. The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) released a joint statement on February 1 outlining their plans to closely monitor volatility in certain stock prices.
“We are closely monitoring how extreme price movement of certain stocks may be contributing to volatility in Canada’s capital markets,” the statements reads. “We will take appropriate regulatory action to protect investors if we identify that abusive or manipulative trading activity may be taking place.”
They also seemed to possibly allude to the activities taking place on r/WallStreetBets and its Canadian equivalent r/BayStreetBets, adding: “We caution investors to consider the source of information and advice they are relying on to make investment decisions. Online chat rooms are unregulated and may contain information that is inaccurate or inappropriate for some investors.”
However, the new interest in retail investing sparked by GameStop’s ascent can also be good for students, as long as these fresh investors proceed with caution.
Huzaifa Memon, a third-year business major studying retail management at Ryerson University, is a week into his investing journey, and he says it’s easier if you stay in familiar zones.
“I didn’t buy GameStop, but just started investing myself, and it’s not too bad at all. It’s a lot easier if you’re investing in an industry you know about,” he says. “I follow many retailers and am knowledgeable in retail technology and e-commerce, so I have a general understanding of where the market is moving,”
Memon has used this background knowledge to stay in the realm of “safe stocks”, which may fluctuate but experience long-term growth.
“As I go forward I’m assuming I will take measured risks, but I probably won’t go outside the general knowledge I have,” Memon says.
Basheer corroborates this, telling other would-be student investors that as long as they learn the correct way to do it, getting into investing is “100 per cent worth the time.”
