Rarely is one company able to change investing history forever.
GameStop was a small-known US videogame retail business. Its share price soared by 700% in a week.
Although the share price of GameStop has since settled, it still has a significant impact on today’s market.
Reality check: Thousands of small investors bought GameStop shares – sending the price stratospheric
GameStop and the Meme Stock trend
The story began when ordinary investors discovered that several opportunistic financial hedge funds were placing bets on the fate of GameStop, a beloved retailer. Hedge funds stand to earn millions if GameStop’s shares drop.
These private investors used online chat platforms such as Reddit to conspire to purchase GameStop shares in order to increase their value. They realised that, if the shares rose, the hedge funds would be left nursing huge losses – a win-win for the conspirators.
The result was impressive: GameStop stock shares soared with increasing numbers of investors flocking in to convince each other to purchase more.
Similar trends were soon observed with AMC shares. This phenomenon of companies’ shares suddenly becoming popular became known as ‘meme stocks’ – a reference to the numerous images, or memes, shared on social media.
There have been many more in the past year, though perhaps none of them have met the same level as AMC or GameStop.
Traditional investors may be curious about what all this means for them. However, the meme stock phenomenon spread ripples to all forms of investing. Investors must learn from it if they wish to build wealth. These are some lessons that we have learned.
1. The share price is not always reliable
A company’s share prices are a great indicator of its fundamental value. What investors know about the company, their outlook on the future and how they feel about it will affect the share price. That is at least how it should be.
GameStop’s shares soared but nothing changed in the company’s underlying worth. They didn’t see six-fold improvement in their prospects overnight.
However, the share price increase was due to a totally different set of circumstances. These included investors’ resolve to defeat wealthy hedge funds in a David and Goliath style battle and additional cash they received from the US government through stimulus cheques.
Independent investment commentator Adrian Lowcock explains: ‘GameStop is a clear example of how, in the short term, stockmarkets and individual company share prices in particular can be driven by factors other than investment fundamentals or future growth potential.
“In this case, frustration about inequality and lockdowns combined with extra cash from stimulus checks drove interest in GameStop.”
2. Our Retail Investors are strong
Two types of investors exist: institutional investors (large funds or companies that hold large numbers of shares) and retail investors (ordinary investors like yourself).
MoneytotheMasses, a personal finance website founded by Damien Fahy. He said: “Before the meme stocks, institutional investors in the financial industry were known as’smartmoney’ and were considered to be superior to retail investor, who were mostly ignored.”
GameStop revealed that even ordinary investors have the potential to significantly influence share markets and prices.
Ordinary investors have also been awakened to their power to move markets and influence the companies in which they hold shares. You can vote in the company’s Annual General Meeting, and you may also ask questions.
Interactive Investor’s head of markets is Richard Hunter. According to him, the GameStop story was an example of how retail investors can have some influence in the market. You can vote, however, which is less risky and allows you to speak up.
3. There are some things you win and some that you don’t
Had you bought £100 of GameStop shares at the best time and sold at the best price over the past year, you would now have £1,261.
Had you bought and sold £100 of shares at the worst times, you would now have £8.
AMC investors are also affected by these stark numbers. From a £100 investment, you could have anything from £24 to £2,584 depending on when you bought and sold.
By comparison, if you had invested £100 in an index of the biggest global companies, you could have anything from £94 to £119 today. While not without its ups and downs, your investment journey would have been much calmer. The figures go to show how volatile investing in individual shares can be – especially when there is a buzz around them.
Be prepared to go through a lot of ups and backwards in order to feel the excitement of rollercoaster rides. Fahy states, “I wouldn’t recommend it. But don’t put your money at risk, especially if you are looking to save for the long term.”
4. These new investors are here to stay
Hundreds of thousands of people started investing for the first time during the pandemic. They were able to save more money and have extra time.
Many investors invested in meme stocks in the hopes of quickly growing their wealth and being part of a huge phenomenon.
GameStop shares were the ten most-popular shares on investment platforms Interactive Investor, AJ Bell, and Hargreaves Lansdown.
These investors didn’t disappear as excitement faded.
Instead, they have now got a taste for investing and many are starting to diversify their portfolios into shares and investment funds more likely to grow their wealth over the long term. Interactive Investor examined the purchases made by GameStop shareholders.
They diversified after purchasing GameStop and started to diversify into other companies, including Scottish Mortgage, Nvidia, investment trust, and Nvidia technology company.
The company also purchased blue-chip tech companies like Apple and Microsoft.
Hargreaves Lansdown from Wealth Platform says while GameStop was a good place to start investing, some of their customers have taken up investment in other funds.
The 10% who purchased a share for the first time in 2020 were able to invest 10% within 9 months.
5. The power of investing communities is growing
It is usually a lonely business to invest. Some people join investment clubs. However, the majority of investors invest either alone or with the guidance of a financial advisor.
GameStop’s surge in share prices was due to the influence of investment communities.
Investors took to online forums to encourage each other to keep buying – and not to sell – to keep the share price from tanking.
Barclays Wealth is headed of behavioural finance. Rob Smith has been with the firm since 2007. According to Smith, it’s understandable why investors would be attracted by the concept of collective action. ‘We naturally form into tribes, and this one had a powerful underlying David and Goliath narrative, so it was particularly persuasive,’ he says.
Smith suggested that people who are interested in investing with a group can take less risks.
He said that groups of investors were looking to make a difference in the governance and environmental aspects of blue-chip businesses by purchasing shares of them, as well as voting at AGMs.
ShareAction is an investment platform that works in this market. Female Invest seeks to inform and connect women looking to invest.
6. Boring? An investor loves a good thrill
We are constantly told by the investment industry that investing should be dull. Investment success is all about slowly growing your wealth.
The meme stock frenzy has shown us that even though investors may get stung, they love a good buzz.
Barclays’ Smith suggested that those who are passionate about thrills should look for a way to enjoy them without risking their wealth.
He advises that you decide beforehand how much money you’re willing to invest in risky investment. “If you are caught up in all the excitement, make sure you have safeguards that you minimize your losses.
7. It is not going to end, the sudden frenzy
While the excitement over AMC and GameStop has slowed down, that’s not all.
Fahy states that “investors are always lured by latest ideas that promise to make them rich quick.”
He adds: ‘Just think about the technology fund boom of the late 1990s – and the bursting of the bubble in early 2000.
“Today’s social media allows these stories to travel faster than ever.
Fahy thinks that Non-Fungible Tokens, or NFTs could be the place where these patterns will play out in this year’s market. These digital receipts are digital proof that an investor has something digital such as a piece or song.
8. Meme stock scan is a self-fulfilling prophecy
A twist is in the GameStop frenzy’s tail.
The company is in much better financial standing than it was last year.
Its inflated share price allowed it to issue new shares. The proceeds were then invested in the company.
This is probably telling of what the company decided to invest to ensure its future. The NFT market is being created.