Marking a milestone: “meme stock” trading one year later

In January 2021, it felt like the internet was overtaken by meme stocks. 

Suddenly, a lot more people were hyped about the market activity happening as we watched something unfold that we had never seen before. 

Here’s a quick refresh on what happened: There was an increase in the number of retail investors buying shares of stocks heavily shorted by some institutional investors, most notably certain hedge funds. This “squeezed” some of the short sellers into buying shares (to cover short positions) to limit their losses. Combined with continuing buying pressure from those that wanted to go long the stocks, this sent shares of companies including GameStop (GME) and AMC Entertainment (AMC) soaring. It was a moment that many believe changed how investors look for and use information in their investing forever.

Undoubtedly it marked a huge milestone for self-directed retail investors (i.e., everyday people that manage their own investing decisions). 

But its lasting impact is more than just a David vs. Goliath tale. 

It’s true that as in all situations there were people that did not consider all aspects of their actions, including some retail investors that jumped in too quickly and engaged in trades that were beyond their risk tolerance.  

Depending on when they started trading and the amount of leverage they used, some investors learned important lessons the hard way. Others who didn’t consider risk tolerance and mitigation strategies may not have had the outcome they hoped to achieve. Some that were engaging with the markets for the first time may have a distorted view of what investing is or how markets behave.

However, as with all things, there are positives and negatives, in this case we believe the positives far outweigh the negatives. Here’s how we believe investing has changed for the better since last year: 

There’s been an emergence of a whole new wave of investors who we call “Generation Investor” (or Gen I).  People of all ages and circumstances have taken an interest in their own financial futures, many for the first time. In fact, as of December 2021, Schwab combined with TD Ameritrade had added more than one million new brokerage accounts for four consecutive quarters, bringing new brokerage accounts for the year to 6 million. 

Undeniably, the meme stock story led people to engage and brought them in large numbers to the financial markets. 

But a confluence of other factors contributed mightily to the dramatic rise in market participation—lower costs, digital experiences making investing easier, better access to information and institutional-quality tools, and increased accessibility to investing with things like the ability to buy fractional share of stocks. All of which blossomed while people had more time to spend on research and investing while at home.

Along with the explosion in trading we saw in 2021, there was another explosion: this time for education.  

New clients genuinely want to learn. 

A survey conducted in February 2021 found that almost all (94%) of new investors want access to information and tools to do their own research, and most (90%) want educational materials to improve their investing skills. 

Looking back, we’re able to see how education has informed behavior. New clients have gained a better understanding of everything from simple mutual fund investing all the way up to complex derivative strategies. 

They’ve also learned about the importance of doing their own due diligence, the value of third-party research, and how to utilize institutional-like trading tools and resources. As a result, they’ve achieved greater balance in their portfolios. Illustrating investors’ demand for educational content and resources, TD Ameritrade Network had more than 26 million views of its financial news and insights in 2021, and Schwab Insights and Education content, which provides commentary on market events, as well as resources for trading and long-term investing had more than 24 million views last year.

Some clients may have come to the markets to trade meme stocks, but they stayed for something else. 

Many are transforming into longer-term investors. 

In a recent survey of Schwab clients, while almost half of those under age 40 traded meme stocks in recent months, not many (22%) were very interested in trading meme stocks in the next year. 

Instead, we’ve seen many of these clients take an interest—some for the first time—in their 401k or retirement accounts and make good choices that fit their goals and risk tolerance needs. 

The extraordinary events of a year ago marked a milestone not just for individual investors but for professional traders too as the lines between the two blurred, and a deeper understanding set in about who might be sitting on the other side of a trade.  

2021 was a year when it seemed everyone became a trader, and for many it began with a fascination with what was happening with meme stocks… but this story isn’t finished. 

A whole new generation of investors have only seen one market cycle and we know what can happen when markets turn. 

But we’re optimistic a new day has dawned, and it is not primarily the spikes or activity of individual stocks. It’s all about the spikes we’re seeing in sustained engagement and education.