Investing in the stock market comes with risks, especially in the age of social media. Valuable information that every investor should be aware of—including the occasional volatility of the stock market as well as investment nuances such as short selling—came into the spotlight recently when Redditors banded together to inflate the prices of retailer GameStop’s (GME) stock.
As well as serving as a refresher on stock market basics, the GameStop situation is also a signpost pointing to emerging trends in investment and fintech. Current and would-be stock market investors can take away some important lessons from this story. Below, 14 members of Forbes Finance Council share what every investor should learn from the GameStop stock saga.
1. Micro-communities can have an outsize influence.
Micro-communities and micro-topics will continue to have outsize market influence that’s driven by natural or synthetic social media magnification. This phenomenon is going to accelerate and be more evident as investors pour into entirely digital asset classes. - Ravi Balasubramanian, Sandbox Banking
2. Trading is a zero-sum game.
The GME story brings to mind one of the adages from Peter Lynch: “Avoid hot stocks in hot industries.” While investing based on fundamental changes within a company can make money, trading is a zero-sum game. When a stock becomes hot, speculative and irrational factors will significantly affect the stock price, making it difficult to make a profit. - Lijie Zhu, Dragon Gate Investment Partners
3. Don’t just follow the herd.
Herd investing can only get you into trouble. It might work once or twice, but when you eventually get burned, that burn will offset all of your prior gains. Invest in fundamentals and solid intuition, not in fickle social movements. - Oliver Sabga, Term Finance
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4. The stock market can be manipulated.
The GME story shared an important lesson with us all: At times, the stock market can be manipulated. What Reddit’s “wallstreetbets_” group showed us all was how easily the market can be manipulated. Long-term investors know the market is volatile and invest with caution for obvious long-term growth. New and young investors have taught us what it means to gamble on the stock exchange. - Natasha Velez, H2 IT Solutions, Inc.
5. Market manipulation can come from multiple places.
Market manipulation can occur both inside and outside of Wall Street. Influence can come from traditional media, social media and other areas. Be cautious and keep it simple. Invest in what you can understand. - Matt Scott, 7xCapital.com
6. Regulation needs to be revisited.
As the Spiderman saga has taught us, “With great power comes great responsibility.” This applies now to retail investors. Sudden moves in the stock market used to be driven by hedge funds, but with the fintech “revolution,” things are different. With the Gamestop/Reddit-Robinhood moment, we all saw that a short-selling squeeze can come from retail investors. A new way to think about regulation is urgently needed. - Arcady Lapiro, Agora
7. You have to consider time and opportunity costs.
Financial decisions—especially investments—all have fundamental variables of time and opportunity cost. The GameStop situation is no different. Although the underlying economics did not follow traditional investment logic, the market makers did not factor in the intrinsic value of the retail investors’ time during a pandemic. Speculation is healthy for the economy, but any high-risk investment needs balance. - John Tytko, Caremerge, Inc.
8. Don’t look at investing as a ‘thrill ride.’
The stock market is not a casino. Investing one’s hard-earned money should be done in a thoughtful and disciplined way. You can get the thrill of a roller coaster ride by going to a theme park; try to avoid mimicking that thrill by riding the wave of a hot stock. Remember, you are investing to build a nest egg for the long-term future, and losing this can be painful. - Sonya Thadhani Mughal, Bailard, Inc.
9. Don’t buy or hold stock as a ‘fan.’
The GameStop/Reddit short-selling story piqued the interest of many non-investors—especially younger generations. Regardless of the public’s interest, ultimately those businesses need to be profitable to maintain such a high degree of demand. That doesn’t appear to be a factor that’s in GameStop’s favor over the last few years. Don’t hold the stock as a fan; keep it as long as it remains a profitable investment. - Jeffrey Bartel, Hamptons Group, LLC
10. Keep your emotions out of investing.
Don’t let your emotions rule your investing decisions. Even recently I have seen reports of people taking out loans to buy GameStop at its highest point for the day. As investors, we have to stay prudent with our investments. You never want to be the one who buys high, sells low and repeats until you’re broke. Unless you’re in the front end of such a windfall, be wary of it. - Justin Goodbread, Heritage Investors
11. Only take bigger risks with money you’re willing to lose.
If you are planning on shorting stocks and playing the high-risk portions of the market, do so with caution. This should be your “Vegas” money—in other words, the money you are willing to lose. It’s okay to take risks and chase some unicorns; just make sure it’s with money you can afford to lose. - Joseph Orseno, Tiltify
12. Don’t just react—research.
“Get rich quick” should never be a strategy. Remember the flip side: Potential huge gains are potential huge losses. Do your research. Know your risks and be comfortable with what you could lose. Be knowledgeable, not reactionary. - Lori Moes, DJM Design CAD & Coordination Services Inc.
13. Beware the power of groupthink.
This was less a David-versus-Goliath story than a lesson on the power of groupthink. Though many investors made life-changing amounts of money, many others found themselves without a chair when the music stopped. As boring as it may seem, understanding the fundamentals wins the day, not groupthink—especially when it’s driven by social media. - Catherine York Powers, Constant AI
14. Use online investment platforms with caution.
The GameStop upheaval highlighted the shortcomings of investing platforms that encourage excessive trading, such as Robinhood. One important lesson is that these systems are not always designed with the users’ best interests in mind. They encourage frequent trading, yet most successful investing is boring and requires patience. Research shows increased trading activity can negatively affect returns. - Marthin De Beer, BrightPlan