In January of 2021, the stock market investing community was turned on its head when groups of retail investors organized online to purchase stock in companies like GameStop, AMC Theaters, and Blackberry after these companies were written off by Wall Street firms. As a result, stock prices for those companies rose rapidly, throwing a wrench into the plans of various hedge fund managers who were short selling those stocks. Hedge funds made expensive bets that stock prices would go down for companies like GameStop, and because of the buying frenzy, around $30 billion in wealth was wiped out from hedge funds over the course of a week. Small time investors who got involved with the frenzy too late also lost money as stock trading platforms like RobinHood prevented or limited trades of these so-called meme stocks. While most investors were able to recover from this incident relatively unscathed, it did expose vulnerabilities in the securities trading industry and raised the possibility of similar incidents occurring in the future. Now, the Securities and Exchange Commission (SEC) has proposed new rules aimed at preventing another GameStop incident which had hedge fund managers calling foul.
The SEC’s proposed rules are intended to increase investing transparency in the securities industry with new reporting requirements for both lenders and those who borrow shares for short sales, a move regulators believe will prevent another GameStop incident from occurring. The Managed Funds Association (MFA), a lobbying group representing hedge fund managers, believes that while these new rules are well-intentioned, they would increase the chances of another GameStop incident by giving rival investors a chance to reverse-engineer their short selling strategies. The MFA and other international investment associations argue that any rule change would severely disrupt all short selling activities in a way that would make the practice unprofitable in the future.
What is Short Selling?
There is a saying in securities investing: buy low and sell high. That is generally a good principle to follow when investing in the stock market, but many hedge funds use a different strategy called short selling, and this can hinder retail investors’ abilities to follow that principle. A hedge fund can identify and make a bet that a stock is likely to go down in value (like GameStop in January of 2021, for instance) and profit if their predictions are correct. The process by which they borrow shares of stock is one of the opaquest in the financial industry, and it only works if other investors are kept in the dark about the bets being made. After all, if another hedge fund was informed about a rival firm’s short selling strategy, they could easily disrupt it by purchasing shares of the stock being shorted. In the GameStop incident, retail investors did exactly that, by driving up the price of the stock, which forced hedge funds to take a hit.
Is Transparency a Bad Thing in the Securities Industry?
Hegde fund managers have good reason to oppose the SEC’s proposed regulations; after all, they get rich using short sales and increased transparency would make this process more difficult – and more expensive. But what about the average investor? When investing in securities, the deck is already stacked against retail investors, which include those saving for retirement using stocks, bonds, and mutual funds to accumulate wealth. The SEC’s proposed regulations are intended to move the balance of power away from large hedge fund traders, so it stands to reason that hedge fund lobbyists would oppose them.
As someone in or near retirement, the more important question to ask yourself is whether you really want to invest in an industry that depends on a lack of transparency to make money. The GameStop incident and other stock market disturbances throughout history have proven that markets can be easily manipulated by large firms and groups of retail investors acting in concert. If the strategies of Wall Street firms run counter to yours, you could end up losing your nest egg, which may force you to delay retirement or accept a lower standard of living in your golden years. Your retirement security is too important to risk by investing in an industry that struggles with the corruption of individuals actively looking to profit on your losses. While requiring hedge funds to be more transparent may limit some of the opaque business practices occurring on Wall Street, the best way to improve your chances of having peace of mind in retirement is to prevent your nest egg from being exposed to the unnecessary risk of the stock market in the first place.
When you receive a financial education from our team of consumer advocates at Crash Proof Retirement®, you will learn about the lies and deception that cloud the securities industry and how you can prevent the risk of losing your nest egg. The proprietary Crash Proof Vehicles used in the exclusive Crash Proof Retirement® System credits interest at rates comparable to securities-based investments, are guaranteed to protect your principal investment—no matter what happens on the stock market or in the broader economy—and there are no fees whatsoever. While the SEC fights it out with hedge fund lobbyists, you can take the steps necessary to secure your financial future with safe alternative investments that exist outside the risky business of the securities industry. To learn more, contact Crash Proof Retirement® to speak with one of our licensed educators by calling 800-722-9728 or visit https://crashproofretirement.com and begin your journey to peace of mind in retirement.