How Young People Are Influencing The Stock Market

April 4th, 2021

By: Anjali Mehta


Introduction

Young people are certainly not as involved in the stock market as older generations; only about one in five Millennials in the United States actually has an investment account. But COVID-19 has triggered many young people to become more financially aware. As younger generations begin to become more involved in the global market, we will see some never-seen-before trends emerge. First, however, is a background of the stock market.


What is the stock exchange?

Most people have heard the term “stock exchange”, but what exactly is a stock exchange? A stock exchange, or the stock market, is a platform where people can buy and sell shares of companies. People who purchase shares of a company (also known as shareholders) pay a certain price for shares based upon supply and demand trends and receive a portion of ownership in exchange. People are usually drawn to purchasing stocks because there is massive potential for profits when you own shares of the world’s most powerful companies. Many stocks are considered to be of mild risk, but because of the high potential for profit, many people are incentivized to take large risks on the market. Every public business must publish financial information for the general public to view; this is primarily so shareholders and potential investors can assess business performance and decide on an approach. Everyone’s investment strategy is different; some investors are constantly trading and taking risks while others buy shares of “safe” companies and hold onto them. No one can predict the market; fundamentally the stock exchange is people taking bets on what they think the market is going to do.


Why are young people becoming more involved in the stock market?

Financial instability is not something new to Millennials (the generation of people between the ages of 25 and 40); many were children during the 2008 recession and saw parents lose jobs and struggle to pay bills, or faced these struggles themselves as young adults. Countless younger Millennials have not yet established a strong means of financial security. The economic troubles sparked by COVID-19 have caused younger Millennials to take a serious look at their financial situation and take steps to strengthen their investments. This can take various forms, but for many, this has meant investing in the stock market.


Overvaluation of Tech Stocks: Disney

One major current stock market trend, in part due to increased investment from young people, is the high pricing of stocks in the tech sector. The tech sector is practically the only sector that has benefitted from the COVID-19 pandemic; demand for tech products has skyrocketed, and they are much less affected by lockdown orders. For these reasons, most investors, especially young people, see tech stocks as a rewarding and relatively safe investment at the moment. The use of technology increases with every generation, so the value placed on these stocks by younger investors is often much higher than that of older investors. However, are these businesses really deserving of the value placed on them, or are investors simply feeding off hearsay from other investors? Disney, for example, is valued extremely highly, with a market capitalization of $343.15 billion as of February 28, 2021. This is an increase of about $131 billion from this time last year. Disney’s performance throughout COVID-19 has been a mixed bag, with their most successful division being in the tech sector: the Disney+ streaming service. This is Disney’s only revenue stream that has seen increased profits during the pandemic. However, between the closure (or very restricted operation) of theme parks, plummeting numbers of cruise customers and movie theatre closures, Disney’s other revenue streams are seeing massive drops in revenue; overall, the business entertained a loss of $2.86 billion in 2020: their first recorded loss in this century. Although Disney was rescued by its streaming service’s performance (Disney+ surpassed their 5-year goal of a total of 73 million subscribers by November 2020), many investors may begin to wonder if Disney is overvalued as its market capitalization continues to grow. It’s really a question of if people believe the performance of Disney+ is enough to merit such high increases in market evaluation; even with outstanding subscriber growth, Disney+ alone cannot possibly account for all the lost revenue from other divisions. Since the start of the pandemic, Disney has had to lay off close to 30 thousand workers (primarily from theme parks) and their movie releases have been much less profitable. This was especially prominent with the 2020 remake of Mulan, which was boycotted by many viewers due to China’s countless human rights violations, where the movie was shot. Combined with how the original release was offered only over Disney+ for an additional fee, this movie was a massive flop. These are only a few examples of the many struggles the pandemic has caused for Disney. Despite incredible progress on vaccine rollout and return to normal life around the corner, it must be questioned if the increase in Disney’s stock evaluation is reasonable. Their performance in the tech industry is not their whole business, and other divisions are performing poorly and will take a while to bounce back. Because of the trust many younger investors place in tech stocks, Disney is becoming dangerously overvalued considering their current revenue levels. This could become a new trend to watch; young people could cause unjustifiably high stock prices, especially in the tech sector, because they place more faith in these stocks than the older investors whom we are used to seeing in the market. If enough people think that a stock is valuable and going to increase in price, and consequently buy shares, then the price will increase, regardless of if the business is successful enough to deserve it. Young people are also more susceptible to outside influences (namely social media) than older investors. One major example of stock prices getting out of control due to social media is the current popularity of GameStop stock.


Increasing Role of Social Media: GameStop

By now, everyone has heard about the newfound and unexpected popularity of GameStop, an American video game retailer. GameStop hasn't turned a profit since 2018, but the stock has been shorted by Wall Street hedge funds for years. A brief explanation of a short is when investors borrow a stock they think is actually going to drop in price, and then they sell it. When they purchase it back at the dropped price, they return the borrowed share and pocket the difference. A major wrench was thrown into their seemingly perfect system by a group of young investors who discussed their plans on Reddit. They purchased a copious number of GameStop shares at the same time, which drove prices up instead down as the hedge funds had anticipated. Because short-sellers borrow the shares they profit off of, they had no choice but to purchase them back at the new high price, which has brought on billions of dollars of debt. Nobody ever thought that a group of regular young adults could have such a profound impact on the largest, most knowledgeable investment corporations in the world. Although this event may be viewed in a comical sense, it must be noted that this could be the start of new stock market norms. As younger individuals are now venturing into stocks, the role of social media will have an increasing importance in market happenings. People are able to discuss their ideas with such a wide range of individuals from across the globe and opportunities for collective action are endless. This event goes to show the power and subsequent fragility of the stock market, especially as more active social media users become investors.


Conclusion

The stock market is a place where people can make great profits if they play their cards right, and as younger people become more involved in the market, many new trends will emerge. The value placed on tech stocks will continue to rise, regardless of if these stocks are truly worth their market evaluation. Social media will play an increasingly important role in guiding market happenings, which illustrates the power that groups of investors can have. It is important to remember that every investment on the stock market is simply a gamble, but some gambles are safer than others. As younger generations begin to take more chances, these never-seen-before trends will continue to be on the rise.


References

What "Going Public" Means
Game Stop
GameStop Operating Income 2006-2020
Why a Reddit group pumped GameStop shares up 1,000% on a lark
Young investors pile into stocks, seeing ‘generational-buying moment’ instead of risk
Millennials and the stock market
Millennial spending and investing during COVID-19
Overvalued Definition
Walt Disney marketcap
Net Income of Walt Disney Company
Disney's profits plummet
Disney plus 73 million subscribers
Walt Disney layoffs - workers struggle
Walt Disney earnings during COVID-19

Image reference

Why young people of color need to be investing in the stock market