Although no one in Europe sent checks to people, the sharply growing savings of households (in the Czech Republic alone by more than 200 billion crowns) also caused a sharp increase in the number of clients of cheap brokers. For example, the Dutch-German Degiro gained almost three times more clients last year compared to 2019 and doubled the amount of assets. In addition, the mass of new clients of these brokers behaves completely differently on stock exchanges. They often draw their investment tips not from analyst recommendations, but from discussion forums on Reddit or Twitter.
Reddit is the originator of the so-called “meme stocks”, ie shares of hitherto little-known companies. Some might normally go bankrupt, but instead grew to absurd market value, then lost and often regained it, which led to the fabulous enrichment of some investors and the impoverishment of those who boarded the top train and did not manage to get off.
However, investors who followed some of the absurd advice from Reddit often succeeded. Illustrative is the example of Hertz, a coronavirus victim who filed for bankruptcy last March and the stock went down. A normal reflex would be to let them be, however on Reddit Hertz was mentioned as a great opportunity. Who bought, didn’t go crazy – the company went through bankruptcy proceedings with new investors and the shares are now traded on the over-the-counter market for around eight dollars. Investors who persevered realized an appreciation of about 2,000 percent.
Economists from the University of South Florida and the University of Kentucky also analyzed Reddit’s recommendations and found that, on average, the day after Reddit’s analysis of a title with a recommendation to buy appeared, retail investors traded seven percent more. The return on investment made according to such analyzes was over six percent per quarter. Contrary to market regulators’ fears that investors would lose money based on Reddit analyzes, the opposite was more common.
In addition, Reddit is no longer the only place for small investors to go for advice. Discord, an application originally intended mainly for players’ communication during online gaming, is being used more and more. The community around the largest Atlas Trading and Stock VIP servers on Discord has over 200,000 members. Their leaders often focus on similar stocks as in January, GameStop, cheap, low-float and high-stakes, which promise to implement so-called short squeeze – that the price will rise to the point where short sellers have to cover an impending growing loss. rapid purchase of shares, which further causes a sharp rise in price. Very often, their tip comes out, for example, at the beginning of June, when shares of Clover Health, which were pointed out by newsgroups on both Reddit and Discord, jumped from seven to $ 22 in two days. However, the key was to sell on time, which often does not work for small investors. In any case, the presence of small investors on the stock exchange thanks to cheap and easy
trading combined with an explosion of information and misinformation about stocks will definitely be a big challenge for both traditional players and regulators. The line between a good tip for an interesting undervalued stock and market manipulation, which will lead to the enrichment of a few lucky ones and impoverishment of many small investors, is still very thin. Needless to say, all good investment advice, which encourages diversification and caution, still applies.
Source: E15.cz by www.e15.cz.
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