At a glance

  • In a few weeks in January, the share price of GameStop rocketed by more than 1,900%, after thousands of amateur investors bought its stock
  • Although some people made a lot of money very quickly, many lost out as the price plummeted after just three weeks
  • What’s more, nearly all amateur investors and ‘day traders’ lose money in the long run
  • This shows the value of seeking expert advice and holding on to your stocks and shares for at least five to ten years

At a glance

  • In a few weeks in January, the share price of GameStop rocketed by more than 1,900%, after thousands of amateur investors bought its stock
  • Although some people made a lot of money very quickly, many lost out as the price plummeted after just three weeks
  • What’s more, nearly all amateur investors and ‘day traders’ lose money in the long run
  • This shows the value of seeking expert advice and holding on to your stocks and shares for at least five to ten years

At a glance

  • In a few weeks in January, the share price of GameStop rocketed by more than 1,900%, after thousands of amateur investors bought its stock
  • Although some people made a lot of money very quickly, many lost out as the price plummeted after just three weeks
  • What’s more, nearly all amateur investors and ‘day traders’ lose money in the long run
  • This shows the value of seeking expert advice and holding on to your stocks and shares for at least five to ten years

The incredible story of how thousands of users of social-media site Reddit dramatically shifted the stock price of an American retail business, GameStop, hit the media spotlight earlier this year. What happened makes for an important lesson in the fundamentals of investing – and why seeking expert financial advice when you’re deciding how to invest money can help you avoid a lot of the downsides.

What was the GameStop story all about?

GameStop is an American retailer selling video games and electronics. Because of the COVID-19 pandemic, the shift to online gaming and resulting poor sales in its stores, most stock-market experts were predicting its share price would drop. Therefore, many investors were ‘shorting’ it – that is, betting that the company’s value would decrease over time.

What is ‘shorting’?

Shorting – or ‘short selling’ – is a strategy used by many professional stock-market traders. Basically, they look for shares in companies that they think are overvalued and therefore likely to fall. They then borrow these shares for a limited time, and sell them with a plan to buy them back in due course. If the price drops as predicted, that means they’ll be buying them back at a profit.

How come the GameStop share price went up so dramatically?

Early this year, thousands of amateur investors in a Reddit group called wallstreetbets encouraged each other to buy GameStop shares, in order to scupper the plans of the investors who were shorting its stock. And, for a few weeks, the plan worked. So many amateurs bought shares in the company, using simple trading apps such as Robinhood, that the huge demand caused GameStop’s share price to shoot upwards. It skyrocketed from $17.25 per share on 4 January to a peak of $347.51 on 27 January.1 So, if you’d bought $1,000 of GameStop shares on the first date, they would have been worth $20,145.51 just 23 days later. In other words, your investment would have grown by more than 1,900% in just over three weeks.

Did everyone who bought GameStop shares in January get rich quick?

It’s true that people who bought shares at the start of this ‘short squeeze’ (as traders call the phenomenon), and then sold when the price was at its highest, made a lot of money very quickly. But many others lost huge amounts. Less than two weeks after the share price hit its peak, it plummeted to $53.50. Those who lost out bought shares too late, once the price had gone sky high, and didn’t sell until the price had dropped below the figure at which they had bought.

Why do so many amateur speculators and day traders risk losing money?

This story shows the risks of trying to second-guess the stock markets on a short-term basis, despite the growing popularity of trading apps such as Robinhood. The secret of success with this kind of strategy is knowing when to buy and when to sell, and for most people who are not experts and who don’t follow the markets in detail, getting this timing right is almost impossible. The statistics bear this out, with one study of amateur traders in Brazil finding that only 3% made a profit after more than 300 days.2

So, what are the best ways of investing money?

When it comes to investing for beginners, if you want to give your money the optimal chance of growing at a healthy rate, the best option is to seek expert advice. Then hold on to your investments for a long period of time rather than constantly chasing a quick return – most advisors suggest at least five to ten years as a minimum. That’s because stock markets can experience quite erratic peaks and troughs in the short term – which might seem either appealing or alarming, depending on your situation and attitude to risk. But over the long term, they tend to rise. With time, you are also allowing compounding (when gains are either reinvested or remain invested, generating their own earnings).

What are the benefits of seeking expert advice rather than going it alone?

In effect, you’re eliminating the issue of taking badly thought-through investment risks – which can lead to big losses – as well as having someone to show you all the different options you can choose from that are most likely to suit your own circumstances and give you the best return for your money.

Recent research into the value of financial advice by St. James’s Place in partnership with Boring Money showed that 90% of people who held savings or investments and used an advisor wanted to get help with the different investment options available to them. The same research also showed that people who chose to use an advisor were more confident when it came to investment decisions.

With this confidence often comes a certain sense of wellbeing, the result of knowing you’re not taking any undue risks when investing money. This is borne out by further research by St. James’s Place in partnership with the ILC (International Longevity Centre UK), which found that “advice improves financial literacy, confidence, and delivers greater control, reassurance and peace of mind”.

It’s probably impossible to put a price on that, but for many it’s likely to be invaluable.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The incredible story of how thousands of users of social-media site Reddit dramatically shifted the stock price of an American retail business, GameStop, hit the media spotlight earlier this year. What happened makes for an important lesson in the fundamentals of investing – and why seeking expert financial advice when you’re deciding how to invest money can help you avoid a lot of the downsides.

What was the GameStop story all about?

GameStop is an American retailer selling video games and electronics. Because of the COVID-19 pandemic, the shift to online gaming and resulting poor sales in its stores, most stock-market experts were predicting its share price would drop. Therefore, many investors were ‘shorting’ it – that is, betting that the company’s value would decrease over time.

What is ‘shorting’?

Shorting – or ‘short selling’ – is a strategy used by many professional stock-market traders. Basically, they look for shares in companies that they think are overvalued and therefore likely to fall. They then borrow these shares for a limited time, and sell them with a plan to buy them back in due course. If the price drops as predicted, that means they’ll be buying them back at a profit.

How come the GameStop share price went up so dramatically?

Early this year, thousands of amateur investors in a Reddit group called wallstreetbets encouraged each other to buy GameStop shares, in order to scupper the plans of the investors who were shorting its stock. And, for a few weeks, the plan worked. So many amateurs bought shares in the company, using simple trading apps such as Robinhood, that the huge demand caused GameStop’s share price to shoot upwards. It skyrocketed from $17.25 per share on 4 January to a peak of $347.51 on 27 January.1 So, if you’d bought $1,000 of GameStop shares on the first date, they would have been worth $20,145.51 just 23 days later. In other words, your investment would have grown by more than 1,900% in just over three weeks.

Did everyone who bought GameStop shares in January get rich quick?

It’s true that people who bought shares at the start of this ‘short squeeze’ (as traders call the phenomenon), and then sold when the price was at its highest, made a lot of money very quickly. But many others lost huge amounts. Less than two weeks after the share price hit its peak, it plummeted to $53.50. Those who lost out bought shares too late, once the price had gone sky high, and didn’t sell until the price had dropped below the figure at which they had bought.

Why do so many amateur speculators and day traders risk losing money?

This story shows the risks of trying to second-guess the stock markets on a short-term basis, despite the growing popularity of trading apps such as Robinhood. The secret of success with this kind of strategy is knowing when to buy and when to sell, and for most people who are not experts and who don’t follow the markets in detail, getting this timing right is almost impossible. The statistics bear this out, with one study of amateur traders in Brazil finding that only 3% made a profit after more than 300 days.2

So, what are the best ways of investing money?

When it comes to investing for beginners, if you want to give your money the optimal chance of growing at a healthy rate, the best option is to seek expert advice. Then hold on to your investments for a long period of time rather than constantly chasing a quick return – most advisors suggest at least five to ten years as a minimum. That’s because stock markets can experience quite erratic peaks and troughs in the short term – which might seem either appealing or alarming, depending on your situation and attitude to risk. But over the long term, they tend to rise. With time, you are also allowing compounding (when gains are either reinvested or remain invested, generating their own earnings).

What are the benefits of seeking expert advice rather than going it alone?

In effect, you’re eliminating the issue of taking badly thought-through investment risks – which can lead to big losses – as well as having someone to show you all the different options you can choose from that are most likely to suit your own circumstances and give you the best return for your money.

Recent research into the value of financial advice by St. James’s Place in partnership with Boring Money showed that 90% of people who held savings or investments and used an advisor wanted to get help with the different investment options available to them. The same research also showed that people who chose to use an advisor were more confident when it came to investment decisions.

With this confidence often comes a certain sense of wellbeing, the result of knowing you’re not taking any undue risks when investing money. This is borne out by further research by St. James’s Place in partnership with the ILC (International Longevity Centre UK), which found that “advice improves financial literacy, confidence, and delivers greater control, reassurance and peace of mind”.

It’s probably impossible to put a price on that, but for many it’s likely to be invaluable.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The incredible story of how thousands of users of social-media site Reddit dramatically shifted the stock price of an American retail business, GameStop, hit the media spotlight earlier this year. What happened makes for an important lesson in the fundamentals of investing – and why seeking expert financial advice when you’re deciding how to invest money can help you avoid a lot of the downsides.

What was the GameStop story all about?

GameStop is an American retailer selling video games and electronics. Because of the COVID-19 pandemic, the shift to online gaming and resulting poor sales in its stores, most stock-market experts were predicting its share price would drop. Therefore, many investors were ‘shorting’ it – that is, betting that the company’s value would decrease over time.

What is ‘shorting’?

Shorting – or ‘short selling’ – is a strategy used by many professional stock-market traders. Basically, they look for shares in companies that they think are overvalued and therefore likely to fall. They then borrow these shares for a limited time, and sell them with a plan to buy them back in due course. If the price drops as predicted, that means they’ll be buying them back at a profit.

How come the GameStop share price went up so dramatically?

Early this year, thousands of amateur investors in a Reddit group called wallstreetbets encouraged each other to buy GameStop shares, in order to scupper the plans of the investors who were shorting its stock. And, for a few weeks, the plan worked. So many amateurs bought shares in the company, using simple trading apps such as Robinhood, that the huge demand caused GameStop’s share price to shoot upwards. It skyrocketed from $17.25 per share on 4 January to a peak of $347.51 on 27 January.1 So, if you’d bought $1,000 of GameStop shares on the first date, they would have been worth $20,145.51 just 23 days later. In other words, your investment would have grown by more than 1,900% in just over three weeks.

Did everyone who bought GameStop shares in January get rich quick?

It’s true that people who bought shares at the start of this ‘short squeeze’ (as traders call the phenomenon), and then sold when the price was at its highest, made a lot of money very quickly. But many others lost huge amounts. Less than two weeks after the share price hit its peak, it plummeted to $53.50. Those who lost out bought shares too late, once the price had gone sky high, and didn’t sell until the price had dropped below the figure at which they had bought.

Why do so many amateur speculators and day traders risk losing money?

This story shows the risks of trying to second-guess the stock markets on a short-term basis, despite the growing popularity of trading apps such as Robinhood. The secret of success with this kind of strategy is knowing when to buy and when to sell, and for most people who are not experts and who don’t follow the markets in detail, getting this timing right is almost impossible. The statistics bear this out, with one study of amateur traders in Brazil finding that only 3% made a profit after more than 300 days.2

So, what are the best ways of investing money?

When it comes to investing for beginners, if you want to give your money the optimal chance of growing at a healthy rate, the best option is to seek expert advice. Then hold on to your investments for a long period of time rather than constantly chasing a quick return – most advisors suggest at least five to ten years as a minimum. That’s because stock markets can experience quite erratic peaks and troughs in the short term – which might seem either appealing or alarming, depending on your situation and attitude to risk. But over the long term, they tend to rise. With time, you are also allowing compounding (when gains are either reinvested or remain invested, generating their own earnings).

What are the benefits of seeking expert advice rather than going it alone?

In effect, you’re eliminating the issue of taking badly thought-through investment risks – which can lead to big losses – as well as having someone to show you all the different options you can choose from that are most likely to suit your own circumstances and give you the best return for your money.

Recent research into the value of financial advice by St. James’s Place in partnership with Boring Money showed that 90% of people who held savings or investments and used an advisor wanted to get help with the different investment options available to them. The same research also showed that people who chose to use an advisor were more confident when it came to investment decisions.

With this confidence often comes a certain sense of wellbeing, the result of knowing you’re not taking any undue risks when investing money. This is borne out by further research by St. James’s Place in partnership with the ILC (International Longevity Centre UK), which found that “advice improves financial literacy, confidence, and delivers greater control, reassurance and peace of mind”.

It’s probably impossible to put a price on that, but for many it’s likely to be invaluable.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

References

1. MarketWatch performance data for GameStop Corp. Cl A for January 2021

2. SSRN, Day Trading for a Living, June 2020

References

1. MarketWatch performance data for GameStop Corp. Cl A for January 2021

2. SSRN, Day Trading for a Living, June 2020

References

1. MarketWatch performance data for GameStop Corp. Cl A for January 2021

2. SSRN, Day Trading for a Living, June 2020

Getting Started

Tell us a bit about yourself and the types of articles you’d be most interested in seeing. And we’ll serve up useful, personalised content that meets your specific needs. Easy.



Find out more about Choices