Of all the reactions to last week’s GameStop stock frenzy fueled by Reddit, Massachusetts Commonwealth Secretary William Galvin had possibly the most eye-opening.
“This is not an investment, this is gambling,” Galvin said, demanding that trading be suspended last week when the frenzy was in full swing. “It lowers the integrity of the market and puts individual investors at risk,” he told Reuters.
Galvin isn’t the only one to characterize the rare stock craze, what some have dubbed the popular victory over Wall Street, as unreserved gambling. Sure, hedge fund short sellers have been badly injured. But also amateur investors who were late for the game and had no one to save them. (GameStop shares fell from $ 325 to $ 60 last week.)
“What they do is like a flash mob for stocks. They show up in one place trying to influence the market. It’s still playing, ”Lia Nower, a professor at Rutgers University who studies gambling and addiction disorders, told Observer.
“There is a fundamental difference between investing and gambling when it comes to stocks,” said Nower, who serves as director of the Rutgers Center for Gambling Studies. “When people invest, they make educated guesses about which stocks will appreciate over the long term. While there is an element of risk, there are pretty good metrics out there for predicting how downturns will improve over time. But when people trade in the day and buy risky investments for a quick turnover, they are essentially gambling by betting money on something that produces a random outcome in hopes of a big win. “
Neither day trading nor equity volatility are new concepts. However, it’s rare for retail activity to have such a profound impact on institutional investors as it is in the case of GameStop. While Robinhood, the consumer trading app, is partly to blame, the pandemic is a more likely reason for day traders’ increased interest in junk stocks.
“People have been ‘locked up’ for a long time. And we know there’s a lot of gambling in prison, ”said Nower. “There are very few things that can be done. Online gambling, online gambling, online trading … all of these things are available on your phone 24/7. And they are addicting when abused. ”
When asked what advice she would give amateur investors new to stocks trading, Nower said, “My advice is twofold. If you are spending money that you can afford to lose and want to gamble in a risky way, you might as well spend it on Robinhood as you could on jumping off a plane. “
“But if your goal is to create wealth over the long term, there is no substitute for learning the basics and devising an investment strategy,” she added.