GameStop lessons for ASX investors

GameStop news has been lighting a fire under Australia’s retail investors. Saxo Capital’s CEO shares his advice for ASX investors.

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A young entrepreneur boy catching money at his desk, indicating growth in the ASX share price or dividends

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Adam Smith, CEO at Saxo Capital Markets Australia, says the GameStop Corp (NYSE: GME) phenomenon has been “lighting a fire under the growing retail investor sector”.

You’ve most likely heard of the so-called Reddit army. They’re the unofficially affiliated group of retail investors, recently linked together via Reddit’s WallStreetBets and other social media.

In mid-January, the group took exception to certain hedge funds shorting certain stocks. (That’s where you make money when a company’s share price falls.) To squeeze out the short-sellers, the Reddit army snapped up shares of some of the most shorted stocks in the US markets.

Two of the shares that got the most media attention, due to their wild price gains and subsequent losses, were gaming vendor GameStop, and movie and entertainment company AMC Entertainment Holdings Inc (NYSE: AMC).

And the results were spectacular.

On 27 January, AMC’s share price leapt 301%. That same day, GameStop’s shares closed up enough to notch a 1,915% gain in 2021.

Then the party began to sour.

Since 27 January, the AMC share price is down 72%. And the GameStop share price has shed 86%. Though both shares are still well up for 2021, mind you.

So, was this just a 21st-century social media statement?

Making money and having fun

Not according to Saxo’s Adam Smith.

“The idea Redditors were buying GameStop simply to make a social statement is a narrow interpretation. The rush on GameStop was driven by retail investors who saw this stock as an opportunity to make money while having some fun, with their peers soon following,” he says.

If you’re wondering if the same thing could happen on the All Ordinaries Index (ASX: XAO), I was too.

So I asked Adam if we could see a similar phenomenon in Australia, noting that Unibail-Rodamco-Westfield‘s (ASX: URW) share price was swept up a bit on the ASX, but really via its shorted European listing.

According to Adam:

Never say never but I don’t think we’ll see a similar occurrence here in Australia – the breadth of listed stocks and the liquidity in the US market (and other international markets) compared to the ASX means opportunities of this kind are more likely to occur overseas than in the Australian market.

ASX investors keen to trade GameStop and similar US shares

If you were watching the meteoric share price rise of some of the stocks targeted by the Reddit army, you might have been keen to get in on the action. If so, you’re not alone.

Even after the subsequent share price retreat of stocks like GameStop and AMC, ASX investor interest in trading these types of shares is on the rise.

Adam explains what’s been happening at Saxo:

What we’ve seen since at Saxo is the GameStop headline lighting a fire under the growing retail investor sector, with the majority of inbound inquiries over the past week being investors looking to trade GameStop and other stocks fitting a similar profile.

Appetite is particularly geared toward international stocks given that markets like the US have the breadth and liquidity required to facilitate successful trading from either the long or short side.

Investor education is paramount

One of the significant potential pitfalls for ASX retail investors here is focusing on the big early gains without considering the wild price swings, even when the shares were broadly trending higher. Not to mention the later huge reversals.

Adam says this puts the onus on brokers to educate their clients:

This trend should also raise questions for investors when they are considering their choice of broker. Market access – especially in international markets – as well as client service, platform stability and the financial robustness of the broker should be paramount when making this decision.

There is a huge responsibility for brokers to educate green investors at times like this. The worry is the GameStop narrative has positioned this as an easy way to make money without making it clear the principles of risk management still apply. Brokers must offer education as well as access. 

Retail investors should therefore be looking for a broker that’s in their corner in terms of giving them the tools, insights and technology to mitigate risk. Forgoing a couple of basis points on execution costs for a broker that’s reliable and keeps your money safe is ultimately worth it. If it seems too good to be true, it may well be – you get what you pay for.

I pointed out to Adam that trading via a broker appears to run counter to the whole Reddit army and Robinhood investor creed.

He was unswayed, saying “Education is paramount. The right broker will provide you with the information, research and risk management tools to facilitate sound decision-making, thereby ensuring that you do not lose more than you had intended to when you placed your trade.”

Could the Reddit army turn to short selling shares?

One of the fears circulating among analysts who watched the Reddit army’s huge impact on select share prices was that this same group could turn to shorting shares. As options markets are involved, that could precipitate some rapid and drastic share price collapses.

I asked Adam for his thoughts. Here’s what he said:

I think the risk of this happening is small. Investors that are drawn to this type of trading opportunity typically possess a long bias when it comes to stock investing and trading. They are looking to buy shares that are on a strong upward price trajectory rather than looking to short sell stocks they see as overvalued.

Trading a share from the short side is more difficult as it requires a fuller understanding of the products available and is a totally different mindset for the retail investor.

Finally, I wanted to get Adam’s take on the current US Securities and Exchange Commission (SEC) investigation into some of the share price movements driven by the Reddit army. Investors who got in early and out on time made a mint. Others who were late to the party and overstayed lost their shirts.

Is this akin to a social media-driven ‘pump and dump’?

Adam said that it was legally too early to make a decisive call, as all the participants’ actions have yet to be thoroughly investigated.

He added:

When events such as what we witnessed with GameStop arise, there are inevitably two sides to the story. On one hand, there are the retail investors and traders who believe that social media is a fantastic platform to share trade ideas with a like-minded peer group. On the other are the short sellers who believe their actions are contributing to an efficient market by aiding price discovery.

Neither group would accept their actions represent market manipulation as they will argue that the forces of supply and demand ultimately restore equilibrium in the stock price.

There you have it.

Happy and educated investing.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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