What can investors learn from the Gamestop saga?

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Following the much-publicized saga involving the share price of Gamestock over the last few weeks, Business Leader spoke to Oliver Woolley, the CEO and co-founder of Envestors – a digital investment platform that brings together entrepreneurs and investors – about what it all means for the future for investors?

The share price of Gamestock, the game retailer rose to an all-time high of $483 then on 8th February it closed at $60.  The stock had been hyped on social media and left many amateur investors in something of a daze, especially if they still owned shares that had dramatically reduced in value.

The same week also brought on slumps in many meme stocks, oftentimes leaving small investors in the wind. Other social media favourites such as AMC Entertainment Holdings Inc. and headphone maker Koss have also seen their shares drop, following increased interest in past weeks on Reddit’s WallStreetBets.

The fight dubbed “the little guys” of Reddit vs. Wall Street has yielded incredible wins for some. Unfortunately, it has also negatively impacted several small investors, with many losing their college funds or life savings.

As Gamestop grew as a movement on Reddit, social media activity led more people to trade shares. Users posted screenshots and memes and shared trading advice on Facebook, Tik-Tol and Twitter.

Giants like billionaire entrepreneur Mark Cuban and Elon Musk jumped on the wagon, posting financial advice on Twitter without any legal consequences. Algorithm amplification on social platforms and no-commission trading apps like Robinhood did the rest.

@mcuban tweeted “I got to say I LOVE LOVE what is going on with #wallstreetbets. All of those years of High Frequency Traders front running retail traders, now speed and density of information and retail trading is giving the little guy an edge. Even my 11 yr old traded w them and made $”.

At the moment it seems that there is no stopping prominent figures such as these making statements which could be viewed as unregulated financial advice online.

However, for anyone in the UK, the reality is very different.

The FCA has a set of regulations to address this issue. That is because financial promotions can have devastating real-life consequences for investors.

Who were the biggest winners and losers?

The first big winner in the GameStop bubble was Reddit. Due to the hype, the company has been able to bag $250m in a Series E fundraising round – announced on February 8. Reddit forums have initially been responsible for the surge in GameStop’s share price and other securities.

The other big winners where institutions and, ironically, hedge funds.

The GameStop saga may have started as a democratized ‘hedge fund’ on Reddit fighting short-selling professional hedge funds. However, data shows it was institutional investors and hedge funds that drove the price of the stock even higher.

JMP Securities analyst Devin Ryan told CNBC “Maybe it’s not as much of just the little guy versus the big guy”.  He went on “I think that it’s reasonable to say that institutional investors were also very active in those stocks last week because there are institutional investors that participate in names that have elevated volume. I think most likely that was also expressed in some of the options activity last week as well.”

Hedge funds like Senvest Management in New York were among the biggest winners in GameStop. After investing at $10 a share, the fund made almost $700m.

Others, like the Tyndall North American fund, were up by 14.36% in February after keeping a position in Gamestop for just three months.

The biggest winners in this story may have been funds, but there’s no doubt that the biggest losers were small investors who held their positions for too long.

Whether they were amateur investors who got carried away or first-timers who took advice from celebrities, many in the UK have seen their savings take a dip as a result of unregulated financial advice over GameStop stock, the Financial Times reports.

The journal interviewed many small investors, like Tori Barry of Wales who said: “We are not big players. We haven’t lost millions, but for us, that is rent for the month, it’s bills. I don’t know how we’ll recover.”

What can investment networks learn from this saga?

The biggest takeaway for investor networks from the Gamestop saga is to be careful who you make a financial promotion to.

Networks often invite, ‘investors’’ to pitching events, but don’t ensure they are the right class of investor. Investors are not all the same and the Financial Conduct Authority has regulations addressing how different classes of investors should be treated.

The professional investors class includes VC or private equity firms. It’s important to collect statements from investors confirming their status and check what type of investor you’re dealing with:

HNWIs have an annual income of £100,000 or more and/or net assets worth at least £250,000 or more. Self-certified Sophisticated Investors (SI) are either members of a network or have invested in unlisted businesses in the two years prior to the event. Restricted investors, the class into which most of us fall, are advised not to invest more than 10% of their net assets in non-readily realisable securities.

Savvy networks know they need to have their investors self-certify their status every twelve months. This ensures the network is treating each individual according the rules of regulation and that investors understand the risks associated to investing.

Networks using social media to promote investment opportunities should have regulatory cover to do so. Contacting investors through email, social media or announcements on your own website all fall under section 21 of the Financial Services and Markets Act 2000 (“FSMA”).

The regulation outlaws any promotional activity that leads to an individual buying shares in a company, without regulatory cover.

In order to get financial advice on how to legally connect investors and companies, consider working with companies like Envestors in order to obtain Introducer or Appointed Representative status.

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