A struggling video gaming company based in Texas set off the fireworks in the new year, leaving mighty Wall Street hedge funds counting their losses.
The Reddit-fuelled trading frenzy in GameStop saw its shares surge from $20 to $483 in about two weeks in January, the Wall Street Journal said, squeezing hedge funds that had bet against the video-game retailer and other companies that were out of favour on Wall Street.
The surge in prices hit short-sellers or investors who bet on the price of a stock to fall.
To cut their losses, traders had to pay inflated prices to cover their short positions, fanning the rally further, which is known as a short squeeze in market parlance. Melvin Capital, a well-known hedge fund, took a huge hit in GameStop rally.
Not just GameStop, some other companies, too, were caught in the surge, which is now being investigated to find out if the rally was the outcome of market manipulation or criminal misconduct, WSJ has reported.
Ever since sanity has prevailed and GamesStop has fallen to around $50 even as the frenzy created wealth for some and destroyed it for many.
"At its highest point, GameStop’s share price was $483. On Friday, the stock was worth $63.77. The trading frenzy — powered by online hype over a rebellion against traditional Wall Street powers—had created and then destroyed roughly $30 billion in on-paper wealth," The New York Times recently said.
Everything under the sun is discussed on social media and the stock market, which has seen a growing interest among retail investors in India and across the world in the lockdown months, too, is talked about on Reddit, Twitter, Facebook and even WhatsApp.
So, is GameStop a blip or a sign of things to come? Can a group of individual investors get together, or like some say cartelise, to influence share prices without looking at a company’s fundamentals? What does it mean for the market at large and investors in particular? We spoke to some analysts and this what they have to say:
Is social media creating a bubble?
Stock prices are a reflection of both fundamentals and market sentiments.
"It is very common to see companies with strong fundamentals having discounted prices, while others with weak fundamentals surging just on the basis of sentiment," Angel BrokingCMO Prabhakar Tiwari, said.
Social media, the epicentre of social interactions, would likely influence stock prices. “Stock prices not just get affected by fear-mongering on the same but also because of unfounded optimism. It goes both ways," Tiwari said.
In trading, it can cause huge gyrations as it can shape opinions and narratives, he said. Retail investors share reports, research and trading tips on Facebook and WhatsApp.
Read more: The hopes that rose and fell with GameStop
"I am not totally convinced that social media can have a huge impact. Yes, there could be short-term gyrations, a small part of which could be due to social media. I am not able to see if one idea on social media can influence a large population of people to follow the trend and hence create bubbles," said R Kalyanaraman, CEO of Espresso, a subsidiary of the brokerage firm Sharekhan.
Kalyanaraman, however, didn’t discount the influence social media can wield.
"If I see new-to-the-market investor now vis-à-vis a new-to-the-market investor say 20 years ago, the current new-to-the-market investor is a lot savvy and has qualified information available at the click of the button. So while a part of the investor clan could potentially get influenced, I am not sure if there could be a large population who would follow the same trend," he said.
Shrikant Chouhan, Executive Vice President, Equity Technical Research at Kotak Securities, added a word of caution—social media was good for experienced people and extremely bad for new entrants is his analysis.
"We get all types of views on social media and then it depends upon respective trader or investor. Social media is unbiased and that’s why it cannot create bubbles in the market," he said.
Is it fanning herd mentality?
Available for free and to everyone, social media platforms are dominated by amateurs and could fuel herd mentality, says some analysts.
"A big chunk of public and segments of investors keenly follow many such social media handles and are in their sphere of influence. This chunk of investors, mostly amateurs and novices, tend to sway the price action in the direction of their perception," said Prem Prakash, CEO at CapitalVia Global Research.
But isn’t that what close-knit groups such as traders and investors do—follow the herd? After all, it takes more than one person to drive up or down the price of a share or the market.
Any group behaviour depicts herd mentality, said Tiwari of Angel Broking. "For instance, a trusted trader shares insight about a stock within his close circle. It will cause a ripple effect that will traverse through close circles of everyone who gets to know that insight. Everyone who gets exposed to that 'trusted information' is likely to develop respective positions based on the same," said Tiwari.
Social media is potent enough to give a structure to the thoughts of the crowd and mould the perception, said Prakash of CapitalVia Global Research.
"The effect of social media is strong enough on its followers and thus people are ready to follow a particular person on social media without any rationale or research by self but just because the action was performed by the particular person or the group," Prakash said.
In India, chances of a GameStop-like fiasco playing out are fewer because it is difficult to create consensus among the wide spectrum of investors. And, the regulatory framework has measures like circuit filters to check any unusual movement in a counter.
"Governance is very strong here and that is why I would say it may not create a herd mentality. However, it depends on whom we are following on social media. If an investor follows, too, many people then it would be a highly risky venture," said Chouhan of Kotak Securities.
How to check losses?
But it is not all bad out there. Social media, if used judiciously, can be worked to our advantage. There is a lot of information out there.
If we agree with something or a nugget catches attention, verify the information and crosscheck it. While investing, it is always better to do your research.
"Social media accelerates the flow of information. It is very natural for human biases to reflect in such information and insights. Such behaviours should be avoided. Any position should be grounded with facts rather than hearsay," Tiwari said.
Social media can create a bubble as it disseminates information quickly but the validity of it can be questioned and checked.
"Social media is also capable of bursting the bubbles," Prakash said. It is how you play that matters.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.