The Chief Economist’s blog: Why Reddit investors are hurting the entire stock market

The exceptionally strong movements in share prices that we have recently witnessed will probably increase savers' suspicions about the stock market. And that's terribly unfortunate. The share price should reflect the expectations that investors have on a company. Nothing else.
 

Nokia is also targeted

At Reddit's investment forum, investors share their opinions and ideas. This is extremely important and valuable, but in some discussions the goal seems to be to mainly target large risk funds, so-called hedge funds. These discussions triggered a snowball effect and have caused quite incredible movements on the stock market.

The American gaming company GameStop peaked at an incredible 2,700 percent above the price from the turn of the year. This development is unbelievable. Especially when considering that GameStop is not a particularly promising company. The company's sales have decreased by 30 percent in five years (2014–2019) and the company has not been profitable for the past two years. Hardly something you would call a company of value or growth.

The Finnish telecommunications company Nokia also got its share of this phenomenon. Nokia's share rose by more than 70 percent in just over a week. The change was so great that the company had to take a stand and published a release stating that it was not aware of any unpublished information or measure that could explain the share's exceptional development.
 

The share price should indicate investors’ expectations 

The share price reflects investors' expectations of the company's business and profitability. Things that affect the share price can roughly be divided into three categories:

1) Company-specific factors, such as patent expirations.
2) Industry-specific factors, such as challenges that the increased amount of online shopping has created for local shops.
3) Factors that affect the entire stock market, such as changes in interest rates. These affect shares in all listed companies.

If the share price reflects something more, it will be significantly more difficult for investors and savers to assess the return and risks of the investment. In the worst case, unclear price volatility increases savers' mistrust of equity savings. My advice to stock savers is simple: be extremely careful if a stock price, for no apparent reason, goes up tens of percent, not to mention thousands of percent.

Lasse Corin lasse.corin(at)aktia.fi
Twitter: @lassecorin