Chronic . The episode’s stock, which has recently been facing hedge funds americans and individuals on some of the actions that have since become highly publicized, and which has apparently resulted in the victory of individuals, is rich in lessons. It highlights first of all, the radical change of paradigm that the Internet has introduced in the access to financial markets.
today, any individual who wants to can have access to virtually the same information that professional investors, as well as to the same assets on the market. The wide range of tools for intervention extends to more technical ones. The stock options have been at the heart of the battle, conducted in January by the u.s. participants in the forum wallstreetbets.
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The creation of these specialized forums on the stock Exchange on Internet sites is also possible to bring together individuals interested in communities very important, up to a size effect visibly capable of measuring the capacity of large institutional investors in the markets. This great democratization of the stock market activity has naturally been accelerated by the emergence of platforms online trading without fees available to individuals on their smartphones. A multitude of David-connected and well-informed are organized to the point of being able to challenge some Goliath on the field.
Leverage
at the same time, the battle in the market January 2021 has also highlighted one of the consequences of lower levels achieved by the interest rate for years : they have not only encouraged greater risk-taking by investors seeking to generate some returns on their investment, but have also greatly facilitated for the more daring financial leverage, that is to say, the faculty of multiplying the expected returns on equity by investing not only these, but also at their sides, a large proportion of borrowed funds. This is true for individuals as for professionals. In the present case, it is clear that the hedge funds involved in the saga of January using degrees of financial leverage enormous, taking a considerable risk that has apparently been spotted and has been their Achilles heel in the battle market.
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Finally, in the case of the United States, it should be noted that the economic management of the health crisis has undoubtedly generated, by a phenomenon quite extraordinary serendipity, the means of this assault stock : the program of grants to individuals put in place by the government in 2020 to help those without jobs has inflated to a part of the population the amount of savings available, it is free to be invested or wagered in Exchange.
This crystallization remarkable of these elements of context in the behaviour of markets hitherto unknown will certainly require regulators to take a closer look to this new situation.
Ambiguity of objectives
But the episode of January also reminds us all of the ambiguity of the goals that can motivate interventions in the Stock market. At its source, an investor has the ambition to estimate the intrinsic value of an asset (often of an action, but it could also apply to a bond, or a currency) and buy or sell in the Stock market if it finds that its market price deviates excessively from this estimated value.
This bet on the reduction of the gap between the market price of an asset to its real value is the soul of the investment in the Stock market. In this sense, the short positions are not in themselves less virtuous than buying positions, since they contribute to one as the other to converge, over time, the market price of the shares to their real value. They all contribute to the efficiency of markets. However, grafted on to this original activity more ” speculative “, without there being a need to put a strain on the word of a heavy load moral, which is to bet on the movement of the market price, beyond any reference to an intrinsic value estimate.
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In the battle between hedge funds and individuals in January, these are obviously two speculations which have confronted each other : the first who bet on the collapse of the price of a share, the latter by betting on its very strong growth, well beyond any estimate fundamental. The question of the intrinsic value of the action was even more foreign to the intervention of the individuals that their goal was not so rich as to make the weapons with the Goliath. And if some of the individuals concerned are likely to be well out of this episode by being among the first to buy, and then selling it quickly, those whose recent purchases have enabled, for example, the share price GameStop to achieve staggering levels have obviously had a very bad transaction by purchasing at a price greatly in excess of any economic value.
Confidence of the investor
beyond the issue of price manipulation deliberate, that the regulation explicitly prohibits, raises the fundamental question of the purpose of an investment in the Stock market. In their crusade against the giants, all of these heralds have been motivated by a cause more political than economic. Regardless of the nobility of any cause, to accept the principle of a complete separation between the stock price and the economic value of rational poses a fundamental problem : the confidence of an investor is entitled to have in the level of market efficiency, and therefore in the knowledge of the level of risk he takes when it is exposed to.
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We may note that a problem of the same nature is raised by the expansion of passive management. In fact, by definition, a passive management does not arise the question of the economic value of the shares it buys. It needs to invest at the height of its subscriptions, and in compliance with mechanical weights of each security in the index to be replicated. The titles of the more expensive, the most weighted in the index, are also automatically purchased, which helps make them even more expensive. And the weight of the passive management in the markets is a challenge that is more systemic than the intervention of individual activists.
At the bottom, to approach the Stock market as a single game, he was brutal, or as a mechanical blind to any economic rationality, as it was convenient, we risk losing sight of the true meaning of investing in the stock market, and in doing so to take risks sometimes excessive, and often misunderstood.
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