GameStop, a video retailer on the brink of bankruptcy, made dramatic headlines at the end of January. They say a picture speaks louder than words so here’s a graph which explains why!
What happened to cause this dramatic peak in the value of GameStop stock, which saw it rocketing by a whopping 2000% over the space of a few days?
The GameStop story in a nutshell
GameStop was struggling in mid January and looked like it could be heading towards bankruptcy. Big traders were short selling on the stock. That means that they were borrowing stock and betting against GameStop in the hope that the value of the stock would continue to fall so that they could buy them back at a lower price later down the line, pocketing the difference.
A Reddit group called Wallstreetbets, the David to the big traders’ Goliath, realised this and decided to intervene to attempt to drive up the share price of this struggling company, along with others such as Blackberry and AMC.
The group is made up of around 3 million small retail investors who trade, often using apps such as Robinhood, and hold low-value trading accounts worth between $500 and $2500. They masterminded a ‘short squeeze’ by encouraging each other to buy GameStop stock in order to cause a surge in demand. The rise in price which resulted from this action by thousands of small investors forced the short sellers to get out of their bets by buying the stock, causing stock value to spiral upwards in a feedback loop.
For many Reddit users this action wasn’t simply about making money. It was a way to express anger and inflict pain upon hedge funds and the big financial players who have made money during the pandemic while most other people are suffering financially. Some big names from the world of industry, most notably Elon Musk, have also been vocal in expressing their loathing of short-selling. His praise for the Reddit investors’ action on GameStop further fuelled the company’s strong rally.
Of course, some Reddit investors will have made big money on this share price spike but others will have bought in at the top and be licking their wounds with some serious losses.
Bill Gates put it perfectly when he said “The idea that you drive a valuation way, way beyond what is rational, it’s hard to see that societally as a good use of time. And, you know, the people who get in it early get a windfall. The people who get in late feel like suckers.”
In actual fact, trading in this way is akin to gambling and many of the members of the group admit that to them it is a game. Let’s be very clear: this is not a sensible way to invest.
How to invest successfully
If you’ve got a small amount of money that you can afford to lose and you find this kind of retail investing fun then there may be no harm in it as long as it doesn’t become an addiction (and let’s not underplay that risk).
If however, you are looking to build wealth to secure your financial future, this kind of investing is to be avoided at all costs. As Bill Gates inferred, it is fiendishly hard to time the markets and you are far more likely to get burned than you are to make a quick buck.
If you want to invest successfully, there are three main rules to follow:
- Don’t try to time the markets
- Invest consistently over the long term
- Diversify your investments
If you’d like help in working out an investment strategy that will build your wealth while mitigating risk our consultants would be delighted to hear from you. They have the knowledge and experience to guide you towards products suited to your unique requirements and appetite for risk. Get in touch now and start on the road to a secure financial future.
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