Bets and risks: The modern stock trade industry

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Earlier this year, hedge funds bet against GameStop’s stock, predicting it would fall in price. However, retail traders came together through the r/wallstreetbets subreddit to drive up the prices, earning money for people who didn’t have much to invest in the first place. CREDIT: “GAMESTOP (EAST BROOK MALL, MANSFIELD CENTER, CT)” BY JJBERS ON FLICKR LICENSED UNDER CC BY 2.0.

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Bets and risks: The modern stock trade industry

The popularization of stock trading among internet communities simultaneously facilitates public engagement with businesses and instigates significant financial risk

ALEX LEFEBVRE

Technology has democratized many aspects of society that were once inaccessible to the average person. Just as access to information and communication has become easier than ever through the internet, stock trading for the masses is now having its moment.

Traditionally if someone wanted to buy a stock in a company, they would open a trading account with a bank and trade through their brokerage account. Way back in the day, your parents would have even called a broker up by phone to place an order for a stock. A commission fee was often charged, which was typically a fixed amount ranging from $10$30 per trade.

Recently, many new competitors have disrupted this industry with zero to low fee commission stock trading. This is where Robinhood comes in: the no-fee, addictively engaging, memeable stock trading app.

Its popularity hit a fever pitch in late January when the app restricted trading on popular “meme stock” GameStop (GME). This led to Robinhood CEO Vlad Tenev testifying before the United States Congress due to concerns of consumer protection, and a hostile interview with Barstool Sports’ David Portnoy, where Robinhood was accused of “turning their back on their clientele.”

In addition to Robinhood, there are other low and no-fee trading platforms such as Wealthsimple and Questrade. Some large banks have reduced their fees drastically to keep up with consumer expectations. For example, TD has lowered its commission fee from $29.99 per trade to $9.99.

These platforms have become a popular option for a younger demographic as people can now make frequent small trades if the amount of money they have to invest is low. A survey conducted through The Ontarion social media platforms indicated that approximately 28 per cent of people surveyed have used a low fee trading platform in the last 12 months.

A younger generation of

Terminology:

Meme stock: A stock temporarily built up through internet popularity. Retail traders: The name for non-hedge fund, individual traders. Margin trading: A form of borrowing money to increase potential of gain on the investment. investors has also become emboldened in their stock trading through the power of online communities such as Reddit.

The r/wallstreetbets subreddit garnered national media attention in January when a coordinated effort through sub threads by retail traders drove up the price of beleaguered stock GameStop.

Hedge funds bet against the GameStop stock, predicting it would fall in price, and so Reddit traders saw themselves in a crusade to disrupt this.

One can view this as progress in the world of finance, empowering the average person to access financial markets and level the playing field with banks and hedge funds who profit immensely through trading equities. However, many new and inexperienced investors have lost money through risky trades that were promoted by r/wallstreetbets.

As reported by Bloomberg, one of the first meme stocks, rental car company Hertz (HTZGQ), was wildly driven up in price after it filed for bankruptcy due to the COVID-19 pandemic halting global travel.

The stock surged 896 per cent at one point in 2020, but is almost worthless today after the company completed bankruptcy proceedings.

University of Guelph PhD candidate of mathematics Michael Yodzis, who conducts research in economics and finance, explained that most people don’t have the resources to do sophisticated research on a company's profitability like those in hedge funds can.

“They often don’t have the knowledge to examine the viability of a company. Instead they tend to ‘chase returns’ and buy into rapidly appreciating stocks,” Yodzis said.

He cautions that this kind of behaviour could lead to bad outcomes for individuals.

“It's upsetting that this kind of thing is happening... If people are chasing price appreciation, they may buy into hype around overvalued stocks that are about to lose steam. Their returns now depend on their luck at timing their exit, or they could potentially lose a lot of money.”

Yodzis sympathizes with retail investors, saying they deserve to have the enjoyment of speculating and making bets, as long as they realize their behavior could lead to irrational decisions such as buying high and selling low.

“They get caught up in the game of chasing price gains and often make impulsive decisions,” Yodzis said.

One must also remember that the recent craze in stock trading and get-rich-quick scenarios is not a new phenomenon.

Described in Bill Bryson’s 2013 book One Summer: America, 1927, stock trading became a widespread addiction in the late 1920’s, proliferating all the way up until the Wall Street Crash of 1929.

One example is a barber who quit his job after making $500,000 on a timely investment, nearly 400 times the national average. And yes, these traders used margin on these trades.

It’s a sobering reminder that although our trading medium may be different today, our basic human drives of greed (and fear) are the same as over 80 years ago.

The trend of democratization of markets will grant more opportunity for the average person. However, it could change behavior and create a more volatile environment as we’ve seen with other technologies.