Famously, years ago Peter Drucker was asked how the Stock Market was doing? As only Peter Drucker could put it, he said “I can’t tell you what the stock market will do today, but I will tell you what it will do in ten years.” The Stock Market to many of us is what Churchill said about Russia, “It is a riddle, wrapped in a mystery, inside an enigma.” For us common people, the stock market is an unknown entity. Many people have lost fortunes due to overconfidence in its operation. A new spur, ripple, seam has been detected in the market in the form of partial stock trading. RobinHood is the new flavor of the week in the financial world.
I am not a financial savant, far from that term. The news of GameStop last week piqued my interest in the term selling stock short. This is what I have been able to find so far, please feel free to correct any of my errors, with facts please.
It appears a company can loan stock to large investors (i.e. Hedge Fund managers). When they loan these stocks it has to be paid for eventually. It is like a business that has a 90 day payment plan for say office products, at the end of the 90 days they owe the balance for the goods. The only difference is these loaned stocks will be due at market value, so the price can go up or down of course. The Hedge Fund manager is betting the value of the company will drop, due to many factors. They acquire the stock (loan) and sell the stock immediately. The stock drops in price, they buy it back and return the stock and payment to the company at the current lower stock price and keep the money made in the in-between. This is a sweet deal for the Hedge Fund manager, he makes money on the misfortune of the company in question. Along comes a group from Reddit. They collectively start buying larger quantities of GameStop stock and the price starts to skyrocket. To give you an example: GameStop was selling for just over $12 per share in December, the stock had hit $389 per share in late January. A group of private stock traders forced losses in the billions of dollars to some firms. Our first response might be, good, WallStreet got spanked. Not so fast. Now it appears Silver is the next target. What company will be next?
The pandemic has introduced uncertainty to an already volatile market. Now, we introduce a new wrinkle in the investment saga. Nobody cares until it affects their bottom line. Pensions (retirement funds) rely on the market to fund their pension disbursements to the companies retirees. If the market loses money, the value of your pension can become under funded, and that is an oversimplification of the facts, but should give us pause with its possibilities. The market will adjust to this wrinkle, but it shows us the old way of doing business is starting to change in the world. Could there be a new international currency standard on the horizon for the world? Will BitCoin continue its upward trend as a digitally encrypted currency? Will we completely cashless in the next 5 years? No, RobinHood has shown us that the world is changing at the speed of computing, and it is unlikely to slow anytime in the future. Keep your debt as low as possible for the foreseeable future. This next two years will be a wild ride. I welcome any thoughts you have on the subject?
2 thoughts on “RobinHood-The New Stock Market?”
Thank you for making this so easy to understand! Your last statement of keeping your debt low is absolutely true!
Thank you for being so informative!!
LikeLiked by 1 person
This blog solidified to me this quote I have heard many times “The older I get, the less I know.”