Retail and Algo Trading: The New Giants Of The Financial World

November 07, 2023
by: Cohen Circle Team

Meme stocks are often thought of as a joke, but what if you can actually leverage them into something worthwhile? The more I’ve thought about this, the more I’ve realized that they are a natural backer of the marketplace.

Meme stocks find their growth not from traditional financial metrics, but from an explosive rise in value driven by social media hype and speculative investing. Despite conventional attitudes toward it, retail investing and meme stocks have emerged as an effective tool, providing an entirely unique avenue to capitalize on growth opportunities.

Retail investing through the use of meme stocks, along with algorithmic trading, is creating huge opportunities for investors to make money in growth companies. Together, they have become the new giants of the financial world.

Meme Stocks For Growth

Small to mid-cap companies that gain attention from retail investors can get a swarm of trading volume well in excess of their issued stock. They can then use this to issue capital and grow in a way that reduces the cost of financing. This is the method that saved both AMC and GameStop from bankruptcy when the meme stock craze was born. And, it has gone well since, as GameStop saw a 1,200% return in the three years after becoming a meme stock.

Social media is now a catalyst for wealth creation. Savvy investors who leverage insights from social platforms have amassed significant gains, illustrating the platform’s potential to act as a driving force in modern trading strategies.

The traditional approach to investing doesn’t account for the impact that social media can have, but it should be taken seriously. It’s not just a negative influence to be scoffed at. People have made enormous sums by understanding and learning from social media.

Algorithmic Trading Is The Way Forward For Financial Institutions

While retail investors are making a bigger impact, financial institutions seem to be doubling down on algorithmic trading, which are automated trades based on predefined strategies set by mathematical models. Larger pools of capital are participating in these types of trades and using data mining to create a more efficient marketplace. Trades are happening much faster than humans could even comprehend and at lower transaction costs.

Of course, algo trading creates new risks by increasing volatility due to instant reactions to market conditions. This can spiral during tumultuous times and create negative ripple effects. They’re also dependent on the quality of algorithms, which can be questionable for some, so due diligence is always required.

The New Value Of Public Markets

Algorithmic trading and retail trading are no longer the underdogs of the financial world. If anything—they’re becoming the proverbial sleeping giants.

Before meme stocks and algorithmic trading, the value of the public markets came from being able to buy and sell things freely between all kinds of investors. This provided companies with a reliable method of growing capital as they grow, with efficient prices. But because of technology, that’s changed.

Now, retail investors are flooding the market through fintech apps, such as Robinhood, and algorithmic trading is happening faster than you can blink. This means that the true cost of capital in public markets can be reduced to harnessing the value of retail investors and rapid electronic trading. These areas are where growth companies can tap into the public markets to access capital and fuel their expansion.

While these aren’t growth companies, Bed Bath & Beyond, AMC and GameStop all leveraged retail investors and meme stocks for recapitalization. As AI develops for trading, there will be an even more significant impact on the public markets and the opportunity from algo trading is likely to grow.

There is a high degree of risk, of course, as it’s impossible to know who will be the next Amazon or Facebook, but algo and retail trading are positioned to make an increasingly large impact.

Early Entry Can Create The Best Opportunity

The prospects for companies in these emerging areas are immense. By exploring novel routes into the public markets, companies can not only grow but also overcome challenges and recover over time.

This new paradigm shows us that the public markets aren’t exclusive to successful companies, but also offer an avenue for struggling companies (AMC and GameStop were struggling before they became meme stocks). In this constantly evolving marketplace, understanding these markets is crucial for financial officers. They can consider using their creativity to leverage the power of retail investors, algo trading and, soon, AI to create primary proceeds and reduce the cost of financing.

As corporate finance becomes entwined with social media sentiment, meme stock movements and algo trading trends, one thing is clear: The traditional marketplace is being challenged, stretched and reinvented. It could be time to lean into the perceived chaos of retail investing, the speed of algorithms and the capabilities of AI to embrace the emerging opportunity and potential for growth.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.

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