For years, outsiders trying to scale the unassailable walls of Wall Street, the epicentre of the world’s financial establishment, had little or no success.
Keeping small, and mostly young, investors out
Being an outsider, aka a small investor, was a wrench; it was near impossible to make money directly in the stock markets as most of the relevant information seemed ‘members only’ and the entry costs were high. To invest in stocks or bonds, savings had to be handed over to ‘insiders’, who would charge hefty fees, use a lot of jargon and be rather opaque about their investment strategies.
Therefore, for a very long time, the spoils of the stock market were out of reach for those outside the financial establishment or for those lacking the funds to pass the investment threshold. There were, for that reason, virtually no young investors in the market.
Crypto currencies (slowly) changed the power hegemony
But then came crypto currencies. Quiet and small to start, but with a very dedicated and determined following. Bitcoin, as the first crypto, was a major push to divert power away from Central Banks. When Bitcoin was in its early days, the financial world did not pay it much attention and the first Bitcoin miners were dismissed as geeks and oddballs.
But now that crypto currencies and cryptoexchanges are widely accepted, the financial establishment can no longer afford to ignore it and calls from the top are loud and clear: crypto currencies are bad and should not be invested in or traded. The Bank of England is even chasing some of the crypto exchanges, aka Binance, out of town. The main reason of course is that crypto currencies are decentralised and outside the sphere of control of Central Banks. (Why Inflation Is Not Scary).
Robin Hood
Crypto currencies, for this reason, unleashed something other than monetary value alone; they empowered a younger, more tech savvy, generation to start investing, first in cryptos (most of crypto investors are under 30) and then also in equities. A lot of people flocked to free trading platforms, such as the aptly named Robin Hood, which has millions of young and small investors on its books, not least because it allows and enables ‘partial share’ trading. Some ‘expensive’ shares, like Amazon for example, trade well over $3,000 and are therefore normally out of reach of most small investors. On Robin Hood you can buy a small part of a share as not to miss out on the potential gains of the stock markets.
Social media and investing
Young investors, as outsiders to the financial establishment, do no longer need or want investing information from the big banks. Many young investors prefer to get their information from social media, especially from Twitter and TikTok and from popular chatboards such as Wallstreetbets on Reddit. By circumventing the traditional information channels, this new investor crowd is also unbolting the powerful role of the big banks’ equity analysts.
The established firms on Wall Street originally scrambled together to explain how these Robin Hood investors were uninformed, not serious and were using the stock markets as a casino/video game and would lose all their money. They were deemed to be just a temporary phenomenon.
But the influx of these young investors has totally changed the markets and Wall Street. 31 million people now have accounts on Robin Hood and are trading actively; the top 10 traded stocks on Robin Hood have become almost a gauge for overall market sentiment.
Meme stocks and the hedge fund fall-out
When small investors started clubbing together as a group to buy shares in companies they loved and which were ‘shorted’ by the financial establishment, things stared to get wild. The small investors pictured themselves as the defenders of the underdogs (stocks in this case) against the big, bad, wolves of Wall Street.
Selling short, btw, means that you sell a share you do not have at value X with the idea that – because you think the share price will go down – you can buy it back later, at a lower price, say at value X-1, earning you the 1 in the process. Selling short is controversial, but common, as it allows funds to bet against the market and make money on the way down, very well documented in the film the ‘Big Short’.
So, when in early 2021, large funds started shorting stocks young investors really loved, especially GameStop and AMC, the Reddit /Wallstreetbets/Robin Hood crowd decided to put the existing power structures to the test and the hedge fund industry is still reeling from this unexpected assault on their undisputed power.
Diamond Hands
The battle cry ‘Diamond Hands’ (meaning do not sell at any cost) was a code for sticking it up to ‘the man’ (seen School of Rock?) and with a resounding success. The prices of GameStop and to a lesser extent AMC went up so much, that the funds who had shorted them lost billions in the space of a few days and had to be bailed out.
After this, Wall Street is a bit less arrogant about the ‘uninformed’ young investors joining its ranks and pays much more attention to their chat boards The most mentioned and trending stocks on WallStreetbets are now certainly on the radar of the big funds, to avoid another of these epic short squeezes.
With their optimistic and rather fearless outlook on markets, young investors may be exactly the breath of fresh air the financial establishment needed, after decades of uninterrupted power. Wall Street certainly will be better for it.
Recommended links:
https://www.ft.com/content/0e3abab6-86a6-4a0a-9d07-d0d69b0daba8
https://myfinancialtimes.com/meme-stocks-explained-how-risky-are-they/
https://www.talksforteens.com/finance/why-does-everyone-speak-about-inflation
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