Pandemic Investors
The initial fear of Covid-19 in Wuhan, China and the first reported case in the United States of America marked a new day for investors worldwide. The fear of the pandemic had led us to halt everything, forcing our lives into an ultimate state of limbo, and financially damaging all sectors as lockdowns continued to be enforced. This catastrophic event led to one of the greatest and sharpest declines across all sectors in the market. Eclipsing the turmoil created during the 2008 recessions, “6 trillion USD in wealth was washed out from the global stock market in the week of 24th February” (Chowdhury). This unprecedented amount would lead the International Monetary Fund to declare that the world is facing the worst economic crisis since the Great Depression.
Before discussing the effect that these retail investors had on our current market, it is important to discuss the motivation and capability of those who partook in this new wave of investors. While investing was much more complicated in the past, applications such as Webull and Robinhood have vowed to ‘democratize trading’ and have it readily available to all that would like to invest their capital. The steep decline in all sectors would motivate “3 million new users in the first four months of 2020” (PYMNTS). Among this new group of investors, approximately half of them would be trading for the first time and opening their first account in a brokerage. Incentivized by the stimulus checks from the 2.2 trillion-dollar cares act, this surge of retail investors were able to experience the ‘thrill of investing’ and make considerable changes in how stocks and options are traded.
Prior to discussing the impact of Options trading, it is important to distinguish the difference between a stock and an option. An option contract is an agreement between a buyer and a seller to purchase some underlying asset or stock at a specific price in the future. Instead of having to pay for the 100 stocks of a certain company, traders could simply buy and sell the contract for those 100 stocks to other investors seeking these contracts. As younger investors joined the market with smaller accounts, presumably consisting of their stimulus checks, the popularity of options trading rose a significant amount. Although the risk of having an options contract that would expire is much greater than a stock that can be held, the idea of being able to trade options at a cheap price and accumulate great profits attracted millions of new traders. In fact, in December 2019, the OCC (Options Clearing Corporation) cleared a total of 227 million of Options (Chow. As of February 2021, an astounding 572 million dollar’s worth of Options were cleared. This increase in retail investors and options traders led to one of the most significant short squeezes in the history of the New York Stock Exchange: The GME incident.
The GME short squeeze occurred in January 2021. In essence, a group of retail investors belonging to the Reddit group ‘WallStreetBets’ directly countered multiple hedge funds by forcing the stock into a short squeeze. A short squeeze typically occurs when a stock that was previously shorted begins to show gains. The short buyers would then attempt to cover their gains by buying back the stock that they had attempted to short, causing the price of the stock to temporarily reach higher than its actual worth (Rodriguez). In GME’s incident, the stock was able to grow about 1000% in the few weeks that it had been short squeezed. The thousands of retail investors rallying in the subreddit : ‘WallStreetBets’ had forced a short squeeze on a dying company. For a short while, the implications of this one short-squeeze were substantial. It showed the potential impact that retail investors could have on the market, especially due to the fact that they were forcing a short-squeeze against multi-billion dollar hedge funds.
The initial fear of Covid that plunged the market so far down that it was comparable to the market during the Great Depression has shown us that not only do retail investors have the ability to invest and stimulate the economy, but also shows the power that they present when they band together. The inclusion of Stimulus Checks and the constant advertising of applications that made trading and investing easy and accessible to everyone created a new surge of investors that has led to an increase in money circulating in our stock market. Overall, this presents a new time for the public who felt that they had no education on how to invest to dive deep into a world that they once felt was cut off from them.
Works Cited
Chowdhury, Emon Kalyan, et al. “Catastrophic Impact of Covid‐19 on the Global Stock Markets and Economic Activities.” Wiley Online Library, John Wiley & Sons, Ltd, 27 Jan. 2021, onlinelibrary.wiley.com/doi/full/10.1111/basr.12219.
PYMNTS.com. “Robinhood Signs Record Number of New Users.” PYMNTS.com, 28 Oct. 2020, www.pymnts.com/personal-finance/2020/pandemic-proof-robinhood-signs-record-number-of-new-users/.
Rodriguez, Joshua. “What Is a Short Squeeze? – How to Find Heavily Shorted Stocks to Trade.” Money Crashers, 2 Feb. 2021, www.moneycrashers.com/short-squeeze-stocks-trade/.
Sebastian, Mark. “How Robinhood and Reddit Have CHANGED Options Trading -- and How You Can Profit.” TheStreet, TheStreet, 11 Mar. 2021, www.thestreet.com/investing/how-robinhood-and-reddit-have-changed-options-trading.
