Getty ImagesAs a result of a number of factors that social media and online discussion boards amplified, the emergence of GameStop GME 0.0% Corp. in early 2021 signaled a market tipping point. Retail investors started the campaign on Reddit’s WallStreetBets forum by using a short squeeze strategy to increase GameStop’s stock price in opposition to hedge funds’ short bets.
The craze spread as social media debates picked up steam, grabbing the attention of the mainstream media and luring retail investors looking to overthrow institutional control. Short sellers who were facing losses bought shares to cover as the stock rose in value, driving up the price even more. The occurrence sparked questions about market manipulation and possible governmental remedies, as well as a larger meme stock movement.
This event highlighted the ability of social media and online forums to affect market dynamics and sparked discussions about how these developments may affect the financial sector in the future. The term ‘meme’ stock was coined and used to define stocks whose stock price experiences significant volatility and movement primarily due to discussions, trends, and speculation on social media platforms, online forums, and other internet communities.
Several causes led to the substantial entry of new investors into the stock market shortly before 2020. The COVID-19 pandemic’s volatility offered opportunities for short-term traders to make money. Investors were able to explore their new world thanks to the transition to remote employment and entrance barriers lowered by commission-free trading and user-friendly platforms…Continue reading…
Source: Reality: High Risk Trading GameStop, AMC & Meme Stocks
Critics:
A meme stock is a stock that gains popularity among retail investors through social media.The popularity of meme stocks is generally based on internet memes shared among traders, on platforms such as Reddit‘s r/wallstreetbets. Investors in such stocks are often young and inexperienced investors. As a result of their popularity, meme stocks often trade at prices that are above their estimated value on the basis of fundamental analysis, and are known for being extremely speculative and volatile.
Interest in meme stocks started in 2020, in what the U.S. Securities and Exchange Commission has called a “meme stock phenomenon”. The stock of American video game retailer GameStop has been one of the most popular meme stocks, with mass purchases of the stock leading to the GameStop short squeeze in early 2021. The stock of entertainment company AMC is also cited as a prominent example. Other examples include the stocks of Bed, Bath & Beyond, National Beverage, and Koss.
The distinction between a meme stock and a non-meme stock is not always clear; for example, Tesla has some of the characteristics of a meme stock: a high price-earnings ratio and being frequently discussed by amateur retail traders on social media, yet some professional analysts do not consider it to be overpriced. Interest in meme stocks is associated with trading platform Robinhood, which pioneered commission-free trading.
According to The New York Times, “Robinhood was the tool of choice for traders in the original meme stocks”. Some meme stocks have often become popular among retail investors after being targeted by short-selling professional investors, such as hedge funds, with participants having the explicit aim of causing losses among those firms. News coverage has described the choice to purchase such stocks as an act of rebellion intended to humble short-selling professional investors.
According to an SEC report, while some hedge funds had big losses, the meme stocks phenomenon did not widely impact hedge funds.The SEC staff report also stated, “some investors that had been invested in the target stocks prior to the market events benefitted unexpectedly from the price rises, while others, including quantitative and high-frequency hedge funds, joined the market rally to trade profitably.” By June 2021, according to Financial Times, some hedge funds were systematically analyzing meme stocks.
Contrary to other risks (e.g. credit risk, market risk, insurance risk) operational risks are usually not willingly incurred nor are they revenue driven. Moreover, they are not diversifiable and cannot be laid off. This means that as long as people, systems, and processes remain imperfect, operational risk cannot be fully eliminated. Operational risk is, nonetheless, manageable as to keep losses within some level of risk tolerance (i.e. the amount of risk one is prepared to accept in pursuit of his objectives), determined by balancing the costs of improvement against the expected benefits.
Wider trends such as globalization, the expansion of the internet and the rise of social media, as well as the increasing demands for greater corporate accountability worldwide, reinforce the need for proper risk management. Thus operational risk management (ORM) is a specialized discipline within risk management. It constitutes the continuous-process of risk assessment, decision making, and implementation of risk controls, resulting in the acceptance, mitigation, or avoidance of the various operational risks.
ORM somewhat overlaps quality management and the internal audit function.The returns from different assets are highly unlikely to be perfectly correlated and the correlation may sometimes be negative. For instance, an increase in the price of oil will often favour a company that produces it, but negatively impact the business of a firm such an airline whose variable costs are heavily based upon fuel. However, share prices are driven by many factors, such as the general health of the economy which will increase the correlation and reduce the benefit of diversification.
If one constructs a portfolio by including a wide variety of equities, it will tend to exhibit the same risk and return characteristics as the market as a whole, which many investors see as an attractive prospect, so that index funds have been developed that invest in equities in proportion to the weighting they have in some well-known index such as the FTSE.
Related contents:
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- AMC Entertainment: The Meme Stock Rally Is Officially Over
- How Smart Is the Meme Stock Crowd? Go, See the Movie
- Meme Stock Influencers Lose Bid to Dismiss Pump-And-Dump Charges
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