Gambling? In the Stock Market? Im Shocked. – The Wall Street Journal

Has Reddit broken the stock market?

Fundamentals have never mattered less, yet the wild moves of a bunch of struggling stocks with dated business models could have real-world consequences. The companies can raise capital more easily by issuing new shares at elevated prices to help them survive or restructure, while executives with bonuses tied to the stock price are closer to cashing in fortunes.

The question isnt so much whether this spectacle makes a mockery of the idea that markets provide an efficient form of capital allocation in the economyit obviously does, at least for these stocks. The real question is whether something should be done about it, not to save investors from themselves or to prevent knock-on problems in the financial system (both worth exploring), but to improve the way the economy works.

The basic theory of markets is that they provide a way for capital to flow to the parts of the economy that can best put it to use, with the test being the ability to earn a profit. The prospect of an eventual profit should attract investors, making a stock rise. That makes it easier for the company to raise new money and for new companies in the same line of business to float, while also sending a signal to executives elsewhere that this is the right place to invest.

The theory has been turned on its head in the past couple of weeks. Reddit group WallStreetBets has delighted in buying flaky companies, because hedge funds were betting on their stocks falling. As rising prices forced hedge funds to retreat, stock-price jumps have sent the wrong signal for where capital should go.

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Gambling? In the Stock Market? Im Shocked. - The Wall Street Journal