Of all the reactions to last week’s Reddit-fueled GameStop stock frenzy, Massachusetts Secretary of the Commonwealth William Galvin may have had the most eye-opening one.
“This isn’t investing, this is gambling,” Galvin said, crying out for trading to be suspended last week when the frenzy was in full swing. “It’s diminishing the integrity of the marketplace and it’s putting individual investors at risk,” he told Reuters.
Galvin isn’t the only one who characterized the rare stock craze hailed by some as a people’s victory over Wall Street as flat-out gambling. Sure, hedge fund short sellers were hurt badly. But so were amateur investors who were late to the game, and they had no one to bail them out. (GameStop shares have fallen from $325 to $60 in the past week.)
“What they are doing is like a flash mob for stock. They show up in one place and try to influence the market. It’s still gambling,” Lia Nower, a Rutgers University professor studying disordered gambling and addictive disorders, told Observer.
“There’s a fundamental difference between investing and gambling when it comes to stock,” Nower, who serves as the director of the Rutgers Center for Gambling Studies, went on to explain. “When people invest, they make educated guesses about which stock will increase in value in the long term. While there is some risk element, there are fairly decent metrics to predict how downturns will right themselves over time. But when people are day trading and buying risky investments for quick turnover, they are essentially gambling by betting money on something with a chance outcome on the hope of winning big.”
Neither day trading nor stock volatility are new concepts. Yet it’s rare to see retail trading activity having as profound an impact on institutional investors as happened in the case of GameStop. While Robinhood, the consumer trading app, is partly to blame, a more likely reason behind day traders’ heightened interest in junk stock is the pandemic.
“People have been ‘imprisoned’ for a long period of time. And we know there’s a lot of gambling in prison,” Nower said. “There are very few things you can do. Online gambling, online gaming, online trading…All these things are on your phone 24 hours a day. And they are highly addictive if they are misused.”
Asked what advice she would give to amateur investors who are new to stock trading, Nower said, “My advice is two-fold. If you’re spending money that you can afford to lose, and you want to gamble it in a risky way, then you might as well spend it on Robinhood as much as jumping out of an airplane.”
“But if your goal is to get wealth over the long term, there’s just no substitute to learning the basics and finding an investment strategy,” she added.