Going to the moon 🚀
GameStop (GME), short squeeze, hedge funds, these are some of the terms you may have heard this week even if you weren’t following financial news closely. It’s the story of a stock pushed by retail investors to go to the moon (as they say). With the help of social media their call to punish the investors betting against the stock has led to spectacular gains in the shares of GameStop. These actions have caused increased volatility and disruption to the markets and got the attention of the financial world.
All of this started when a group of private investors that are part of a trading group on Reddit, WallStreetBets, decided to pump a stock called GameStop, which was heavily shorted. The reason it is so shorted is because it’s a retailer, we are in a pandemic and people tend to buy their games online nowadays anyway. Amplified by the use of social media, the buying frenzy on this stock led the price from $19.95 on 12th of January to $336.01 on the 29th of January at the time of writing. This is a 1,584% rise in three weeks. The hedge fund Melvin Capital has reportedly lost close to 50% in the past weeks and had to be given lifelines of billions of dollars to stay afloat. Simply speaking, the investors decided to buy up GameStop and create a short squeeze whereby short sellers of the stock were forced to buy shares to cover their losses which only amplified the buying volume on that stock. Now the group is targeting other companies, which have a lot of short bets against them as a result of the pandemic, like AMC and American Airlines. The group has now also turned its attention to silver.
What has happened in the last few weeks shows that the wave of new traders sprung from the pandemic can band together and move markets just like the pros. For now the aftermath of these events is still unknown. Will there be more companies bought up for the sake of sticking it to the establishment? Can or will regulators try to intervene? After all, GameStop’s meteoric rise has already been addressed during a White House briefing. Will this new breed of traders become a force to be reckoned with? One certainty is that when the price of GameStop eventually goes back to a fairer valuation, some will be left holding the bag and suffering significant losses. For every trade there is a winner and a loser and that will never change in financial markets.