Trading vs. Investing: Which is Right for You?
To consider this question, let us take a look at recent headlines regarding GameStop (GME). At the beginning of 2021, GME was trading in a range of +/- $19 a share. At the end of January, the stock suddenly exploded within a few days and reached a peak of $380 on January 27th. Since that time the stock has seen tremendous volatility and is currently priced at $95 as of the writing of this article. Where the stock will close in the coming days is anyone's guess. What has caused the wild volatility and headlines?
The movement of the stock is being attributed to a groundswell of interest by retail investors, as promoted by social media platforms including Reddit. The strategy of these retail investors appears to be centered on creating a “short squeeze” to various hedge funds who had open short positions on GameStop (an options trade). In essence, these hedge funds had borrowed money and sold shares of GameStop without actually owning them first. They had hoped that the stock valuation would go down so they could buy the shares cheaper at a later date to profit on the difference. With the retail investors bidding up the price, this put tremendous pressure on the hedge funds to purchase the shares sooner than expected, closing out their positions at great losses.
But what about the underlying actual value of GameStop? Wall Street analysts that have issued ratings and price targets for GameStop with an average 12 month price target of +\- $12 a share, with estimates as high as $33 in as low as $3.50 1. With the stock currently trading at a much higher price, it highlights the inherent risks involved with options trading and speculative purchasing. Further complicating the matter, there have been several online trading platforms that have limited trading on this position, inviting scrutiny from the investing public as well as politicians and regulators.
Observing these headlines demonstrates that there are major difference between trading versus investing. Trading focuses on short term speculation and carries with it the potential rewards but also perilous risks of loss of principal. As CFP’s we help our clients to become successful investors. We accomplish this by designing a customized financial plan and managing a diversified investment portfolio designed to achieve their long-term objectives. When you have a solid plan in place, it can help you stay focused on the long term while avoiding the pitfalls and stress of speculative trading. Feel free to check out our page on our financial planning process and please contact us to learn more.
1. https://www.marketbeat.com/stocks/NYSE/GME/price-target/
The commentary is informational in nature and not intended to imply a specific strategy or course of action. Investment advice and recommendations are only provided according to each individual’s personal circumstances. Chancellor Wealth Management is an investment advisor firm registered pursuant to the laws of the state of Georgia. The firm is also registered to conduct business in the states of South Carolina and Texas. Copyright © 2021 Chancellor Wealth Management, All rights reserved.