Is Fintech Democratizing Finance- All you need to know!

 

An intriguing story has emerged over the last few weeks. A financial drama along the lines of The Big Short. It's David versus Goliath in the business world, with a "Rich vs. Poor" aspect to it. In 2021, an unbelievable story will begin. If you haven't been keeping up, here's a quick recap. This is especially challenging given how much everyone is discussing it. 

Also discussed is why it is significant in the context of fintech. On the social networking site Reddit, an online group has developed with the objective of taking on hedge funds. As the name implies, this group is not a couple of guys in their mother's basement. It is known as WallStreetBets. It is estimated that around 6 million regular investors are participating. This story, as is frequently the case with financial stories, may have lingered on the outside of the financial world. 

It did, however, succeed in capturing everyone's attention. An interesting story because it highlights how fintech is far from finished with its disruption of financial services. Is fintech assisting in the democratization of finance?

What happened?

A few people on WallStreetBets argued in support of a number of equities. They did it again, as they often do. The majority of the firms are well-known names that have struggled in recent years: Nokia, BlackBerry, Bed Bath & Beyond, and, most notably, GameStop. The American video game shop did not have a very successful year for obvious reasons. Some Redditors, on the other hand, thought it was underappreciated. 

Because, at the end of the day, video games are quite popular. That is entirely right. And they would eventually return to GameStop to buy more of them. Overall, this is a reasonable examination. These inexperienced investors began to pump funds into the market. The stock's value surged. You may start with as little as $10 if you use low-cost trading apps like the well-known Robinhood. In some ways, this might have been the end.

On the other end of the scale, hedge funds were also pouring money into the market by short selling. Hedge funds are involved in more than one activity. Short selling, on the other hand, is a typical component of their investment strategies. As part of a long-short stock portfolio strategy, for example. Their conclusion was that GameStop was overpriced. They were right. However, there are several disadvantages to short-selling that should be addressed. 

The wave was simply too strong for the hedge funds to ride. We know this because it fueled the Wall Street Bets gang to drive the stock price skyrocketing to infinity and beyond. It had increased to well over $400 in a few days. As a consequence, the hedge funds were completely annihilated. Melvin Capital's hedge fund partners had to step in to preserve the firm due to substantial losses. Not long after that, it pulled the plug on GameStop.

Occupy Wall Street

At the moment, it was evident that this was a battle between the people and Wall Street. What's the deal with this? Actually, it's not all that difficult to figure out...! Remember the years 2008/2009, when the world experienced one of the worst financial crises in history? I'm certain you do. That was the result of a few Wall Street suits fiddling with financial instruments with little understanding of what they were doing.

This, incidentally, led to the formation of the fintech sector as a whole. But remember how no one was ever arrested or sentenced to prison for careless gambling? For making a lot of money but also undermining the economy? Some people, it appears, can recall... And they're out for retaliation. The story continues to unfold... Fintech is democratizing finance, but only to a point. Various trading platforms, including GameStop, have halted or prohibited the trade of these stocks in yet another dramatic move. 

Robinhood, the well-known commission-free trading app, is a nice example of such a platform. The biggest cause of concern for trading apps was highlighted as volatility. It was a clever move from a fintech firm that takes pleasure in democratizing the trading process. At the moment, it appeared like they were bowing in to pressure from hedge funds. To put it another way, Robinhood's tagline is "investing for everyone." 

Robinhood's response to the criticism was inadequate, giving the appearance that this was the case. To the point that the CEO has explained what happened to members of the United States Congress. The trading app, on the other hand, indicated that it was most likely due to clearing issues as well as a poor financial situation. This statement is less promising than the prior one. The latter caused them to seek a $1 billion bailout from its venture capital backers. And only a few days later, another $2.4 billion was raised.

To put it plainly, hedge fund managers and professional investors disliked amateur speculators. They don't appear to believe in the potential of fintech to democratize finance in any manner. They are audacious enough to do what we do. According to a CNBC interview with Leon Cooperman, a wealthy hedge fund investor, only speculators owned shares in GameStop. 

And it was obvious that they had no idea what they were getting into. "Show me someone with a long track record of success, and I'll show you a brilliant man." It should be emphasized that this is coming from someone who was just charged with insider trading. Leon, do you have a solid track record? You couldn't make this stuff up!

Market manipulation?

There was also debate about whether what the Redditors were doing could be considered market manipulation. There is no doubt that this is not the case. Even so, how does this vary from what hedge funds are doing in this situation? It is called market manipulation when a group of retail investors join together to buy a stock. When a collection of hedge funds join forces to sell a firm, it is an indication of sound investing.

What Precisely is Going on on Wall Street, and what is going on with Short Selling?

If you believe what happened was an accident, I have some bad news for you. These kinds of incidents are common in the financial markets. As they say, not the "amateurs," but the "professionals." Bringing together a group of investors to purchase or sell is a common practice. It is common for investors to advise other investors to buy. 

It is common for investors to notify the rest of the market that they are selling an investment. This is not always considered insider trading. It is also not essential to include market manipulation. So long as no one person in particular benefits from the circumstance. As a result of their behaviors, some Redditors will eventually lose money. In certain circumstances, this may be true. Their ultimate goal, though, was to bring down a hedge fund. Is this an issue? 

After all, the hedge fund was brought in to put GameStop out of business in the first place. The technique of starting a position by borrowing shares of a stock or other asset is known as short selling. The investor thinks that the investment's value will fall by a particular future date—the expiration date. The investor then sells the borrowed shares to purchasers willing to pay the current market price for the shares. 

The trader is betting that the price of the borrowed shares will continue to fall until they must be returned. Furthermore, clients may be able to obtain them at a lower cost. The risk of losing money while selling a short sale is theoretically limitless. Because the value of every asset has the potential to increase indefinitely.

So, what is the point?

A typical investor may investigate a number of companies. Company A presents itself in a professional manner. I plan to buy it because I feel its value will rise. I will not invest in Company B since it looks to be expensive. That would go one step farther in the instance of a short seller. When they look at Company B, they conclude that "not acquiring it is insufficient." They think, "In order to earn a little money, I'm going to destroy a little bit of shareholder value." 

Short selling is, at its heart, a bad decision. Instead of actively wanting for someone to lose money, you may be investing in a competitor. As a consequence, don't be surprised if the general population seems unconcerned when you get burnt as a result of your conduct. At this point, the discussion shifts to a more philosophical level: what is the actual objective of short selling? What more can you do but speculate and hope a company goes bankrupt? And that's before we get into more dubious behavior. 

Consider taking a short position and openly criticizing the company as an example. The idea is to drive down the stock price in order to profit quickly. Citron Research would accomplish just that. GameStop, by the way, experienced a considerable financial loss as a result of this.

Finance being Democratized through Fintech? Not quite there yet...!

It will be interesting to see how foreign regulators react to this issue. From the sidelines, they've been keeping a careful eye on everything. What are your long-term goals? People are not allowed to discuss stocks, but Wall Street executives are allowed to short sell. It will be ludicrous to classify this as guesswork while permitting other dubious practices to continue. Worse, would you restrict regular investors' access to buy certain securities? 

The issue is that one of these two groups of people is an expert at lobbying. And it's not just the Redditors who are in their pajamas. Politicians, based on what has been seen thus far, appear to be on the side of individual investors. The Robinhood disaster highlights two crucial facts concerning financial technology (fintech).

First and foremost, we got a taste of what fintech can do. In terms of distributing some financial power to a huge number of individuals, this is correct. We can really democratize finance by enabling ordinary people to compete with experienced investors. In addition, we defeated them at their own game. More broadly, seeing such a huge number of regular people return to the stock market is quite positive. 

We need more participation from a broader spectrum of individuals to keep Wall Street from becoming completely divorced from Main Street. Let's hope this is a continuing trend!