Amateur traders warned of Stock Market War risks Amateur traders warned of Stock Market War risks
RNZ News, Wellington, January 31, 2021 A GameStop store in Miami, USA (Photo: CC BY 2/ Phillip Pessar)
Amateur traders should be careful diving into a quickly changing ‘Stock Market War’ such as the GameStop phenomena without fully researching what they are getting into, the NZ Shareholders Association has said.
The US Stock Market and institutional investment firms have been reeling from a wave of interest from armchair traders, who have bid up the prices of US companies, including GameStop (GME), Blackberry and Nokia.
Association Chief Executive Oliver Mander said that New Zealanders trading via Apps like Sharesies should look before they leap.
“It may feel really good to be able to sock it to all the institutional investors, but actually it is still really important for vigilant investors to know what you are buying.Ultimately, if the price that you are paying for the shares does not reflect the value of the sum of the parts put together, you will lose out,” he said.$GME billboard in New York City (via Reddit) pic.twitter.com/f7EuWGSVra
— Market Rebellion (@MarketRebels) January 30, 2021
How it began
The Movement began when Reddit social media forum users began to highlight stocks being heavily ‘shorted’ by larger Wall Street hedge funds.
Shorting is an investment tactic where a large investor can pay a fee to borrow shares it thinks will decrease in value, then sell them with the intention to buy them back once they are cheaper and pocket the price difference, before returning the borrowed shares to the owner.However, if the shares increase in value the firm that borrowed and sold them still has to purchase them back to return to the original owner and will make a loss.
Reddit users recognised the shorting tactic in play with the GameStop stock, and others, which fuelled a swarm of amateur investment that drove the prices up, leaving the companies that had been shorting the stocks exposed to potentially huge losses.
Mr Mander told RNZ that while it was tempting to follow suit, if the share price was inflated to extreme levels then shareholders were likely to lose money.
Previously he has advised that investors should not rely solely on information from social media, but instead should have a portfolio strategy.
And warned that ‘gaming’ the market, aiming to make short term gains in a volatile market, was essentially “gambling.”
Advice from Sharesies
New Zealand online investment firm Sharesies issued a warning to users on its website, due to the high interest in GameStop and other stocks.
“Please, make sure that you do your research before investing, and think about how these investments fit in with your long-term investing strategy.We believe that everyone should have access to investing.[But] investing involves risk.
You are not guaranteed to make money, and you might lose the money you start with.”
Hype and ignorance
Cryptocurrency firm founder Justin Sun indicated on Twitter his support for the GameStop stocks and promoted his own cryptocurrency, TRON.
But Tauranga trader Sam Fisher said instead that the share price spiked for Tanzanian Gold, which has the same stock market abbreviation as TRON; TRX.
https://twitter.com/justinsuntron/status/1355181105280733186?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1355181105280733186%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.rnz.co.nz%2Fnews%2Fworld%2F435518%2Fwarning-for-nz-shareholders-caught-up-in-gamestop-surge
Fisher said that traders appeared to be getting caught up the in hype without being fully aware of where they were putting their money.
“You could see quite clearly people jumping on the bandwagon – did not even realise that TRX was a cryptocurrency, not a stock, and so they went to the Stock Market, typed in TRX and bought whatever it was purely out of ignorance.
“What you are seeing is hype and ignorance, all together.”
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