GAMESTOP shares surged 700% last week after they were targeted by an army of amateur traders, causing professional hedge funds to lose billions of dollars.
The trading frenzy began in late January, and some amateur traders have made some serious cash out of the surge.
Funds such as Melvin Capital and Point72 have made heavy losses as a result, the NY Post reported.
But the Reddit army phenomenon now seems to be winding down as GameStop’s share price sharply declined.
Yesterday saw stock plunge by more than 50%, and tumbled 31% on Monday.
Despite this, many of the message board’s 8.2 million members pledged to hold onto their GameStop shares.
Members pledged to do so to spite the hedge funds that bet against the stock.
If you’re wondering what is going on, we round-up what you need to know.
Buying stocks and shares is a risky businesses.
Remember, investing is not a guaranteed way to make money. Your cash can go down as well as up. Make sure you know the risks and can afford to lose the money.
Some stock trading sites like Robinhood also temporarily suspended users from buying and selling shares, which can see you miss out on top profits.
However, Robinhood has relaxed the limits in recent days.
Here, we explain the key points you should be aware of before investing in GameStop shares:
1. GameStop was “failing” before the shares surge
GameStop is a US computer games retailer that has been struggling to compete with the shift to online shopping.
The 37-year-old chain has thousands of shops across America but recently announced plans to axe 450 of them this year.
Risks of buying shares
INVESTING and buying shares can be risky and should not be entered into without knowing what’s at stake.
It’s essentially betting that a company’s value will go up but it’s not guaranteed. You should only invest what you can afford to lose.
The price of shares can go up or down, depending on whether people change their minds about how well a company is performing.
If share prices fall, the value of your investment falls too and you could end up out of pocket.
Holding shares in just one company is very high risk, explains MoneyAdviceService, as you could end up losing some or all of your money if it gets into difficulties.
Diversifying your investments – buying shares across a number of different companies – can spread your risk.
Investing long term – for more than five years – will also reduce your risk as it gives you time to ride out the lows.
The Financial Conduct Authority (FCA) recommends asking yourself these five questions before buying shares:
- Am I comfortable with the level of risk?
- Do I fully understand the investment being offered to me?
- Am I protected if things go wrong?
- Are my investments regulated?
- Should I get financial advice?
It has also been hit hard by the pandemic and in general, it’s not expected to return to its pre-Covid sales.
However, Peter Hanks, analyst at DailyFX.com, reckons the recent share price hike could save it.
He said: “The rapid rise in share price might allow GameStop to raise more capital by offering shares, granting GME the opportunity to stave off bankruptcy or even implement some of the changes to its business operations that early buyers of the stock were clinging to as bullish catalysts in the first place.”
2. Stocks soared by 700% last week but now they’re tumbling
Between Tuesday (January 26) and Thursday (January 28) when the trading frenzy began to start, shares in the company soared by a staggering 408%, from $96.80 (£70.83) to $492.02 (£358.44).
In fact, shares rose by an incredible 15,039% since April 2020 when they were priced at just $3.25 (£2.38).
It means investors who bought at April’s low price and sold them at its peak price will have made a profit of $488.77 (£356.08) per share.
But shares are volatile and can quickly fall as fast as they can go up.
GameStop shares plunged below $100 per share and barrelled toward their steepest one-day decline on record on February 2.
At one point, the gaming company’s shares fell by as much as 67 percent apiece on Tuesday before clawing back.
They have collapsed by as much as 77 percent since January 29, after Robinhood and other brokers restricted customers from making some transactions.
3. Reddit investors are behind the surge
The retailer has been caught up in a David and Goliath stocks and shares saga between amateur investors and Wall Street hedge funds.
Similar to many failing companies, the business has become the subject of what’s known as “short selling”.
In simple terms, this is when professional investors borrow shares of stock to sell, and then buy them back at a lower price.
Essentially, they are betting that the stocks will drop in value so they can pocket the profit when they hand them back to the company they borrowed them from.
They rely on the company failing, making it a risky way of raising cash – any positive news could see shares rise and cause them to make a loss.
To prove a point, the Reddit community – the Davids – decided to take on the hedge fund – the Goliath – that was short selling by buying up GameStop stock as quickly as possible, driving up share prices.
But the hedge fund still needed to return the borrowed stock so ended up buying back the shares at a hugely inflated price, costing them billions causing it to go bust.
This made the price soar even more. When this happens, it’s called a “short squeeze”. The GameStop losses caused the hedge fund to go bust
“This phenomenon is indicative of the youth investment mindset,” said investment expert and CEO of BlackBook Investments, Mohit Tater.
“Young investors are among the most innovative, finding new ways to capitalise on the systems that confine them.
“But their dedication to sustainability and social justice is given equal weight to their exploitation of the neoliberal capitalist model.
“We haven’t seen the end of Reddit vs Wall St and we’ll be seeing this phenomenon develop and shape the market over the coming months.”
4. Some trading platforms stopped taking new customers
The surge in amateur investors snapping up GameStop stock in recent days has left some trading brokers struggling to keep up.
In fact, a tweet from billionaire Tesla boss, Elon Musk, earlier this week inspired even more people to invest.
Posting a link to the GameStop Reddit thread, he wrote “Gamestonk!!”.
Some trading brokers, including TD Ameritrade, were forced to stop taking on new customers while they dealt with the backlog.
At the time, investment platform Trading 212 said: “Due to unprecedented demand, we have temporarily stopped onboarding new clients.
“Once we process the existing queue, we will be open for new registrations.”
5. Investing is risky and you could lose it all
Investing is essentially gambling and there are no guarantees that you will see what you pay in go up.
The fall in share price means that you’ll likely make a loss.
Highs don’t last forever, and often a short squeeze ends in prices dropping back to where they were before, although after how long varies.
Russ Mould, AJ Bell Investment Director pointed out that GameStop shareholders need to find a buyer to lock in their profit.
He said: “Who is going to do that, in the knowledge that the share price has been wilfully ramped, there is hot money looking for an exit and the valuation looks lofty for a loss-making retailer?
“Booking a profit might not turn out to be as easy as it looks, at least anywhere near the share price peaks.”
Mr Hanks reckons buying GameStop stock isn’t wise as their value has already appeared to have peaked.
He explained: “The behavior of GME shares has passed the point of traditional “investment analysis” into full blown mania so investing in GameStop at this stage might be more akin to sports gambling, rather than making an educated wager on the company’s financials or revenue expectations.”
6. It’s not illegal but regulators could take action
Leading hedge funds in the US have been calling on regulators to take action against this kind of trading behaviour, arguing the public shouldn’t be allowed to control the market like this.
But there’s no evidence that what the amateur investors did was illegal.
Even so, regulators in the States are said to be monitoring the situation, according to CNBC News, and that the Biden administration’s economic team was “monitoring the situation”.
Mr Mould explained: “There is no law against what has happened, although the co-ordinated nature of the buying via social media could be seen in a worst case as intentional market manipulation and America’s Securities and Exchange Commission is investigating.”
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