Traders advised to look before they leap

WELLINGTON: Amateur traders should be careful diving into a quickly changing ‘‘stock market war’’ such as the GameStop phenomena, without fully researching what they were getting into, the New Zealand Shareholders’ Association says.

The United States stock market and institutional investment firms have been reeling from a wave of interest from armchair traders, who have bid up the prices of US companies, including GameStop, Blackberry and Nokia.

Association chief executive Oliver Mander said New Zealanders trading via apps such as Sharesies should look before they leap.

‘‘It may feel really good to be able to sock it to all the institutional investors, but actually it’s still really important for vigilant investors to know what you’re buying.

‘‘Ultimately, if the price that you’re paying for the shares doesn’t reflect the value of the sum of the parts put together, you will lose out.’’

The movement began when Reddit social media forum users began to highlight stocks being heavily ‘‘shorted’’ by larger Wall Street hedge funds.

Shorting is an investment tactic whereby a large investor can pay a fee to borrow shares it thinks will decrease in value, then sell them with the intention to buy them back once they are cheaper and pocket the price difference, before returning the borrowed shares to the owner.

However, if the shares increase in value, the firm that borrowed and sold them still has to purchase them back to return to the original owner, and will make a loss.

Reddit users recognised the shorting tactic, which fuelled a swarm of amateur investment that drove the prices of the shorted stocks up — leaving the companies that had been shorting the stock exposed to potentially huge losses. — RNZ