What's up (and down) with GameStop?

Brett Roper, CFP®, AIF® |
Categories

I started to see and hear about GameStop in the news last week and I know some of you did too.  I became intrigued with the brick and mortar store that sells video games partly because my kids play video games but mostly because these stores are typically located in malls.  GameStop is based in Grapevine, Texas and they have more than 5,000 stores.  However, there has been a long-term shift by consumers away from brick and mortar stores toward buying games online directly through your preferred gaming console.

 

It has been a wild month in regards to the stock price of GameStop.  On January 8th, the stock price was right around $18 per share.  The share price doubled 4 trading days later.  It kept edging higher before nearly doubling this past Tuesday, January 26th and then more than doubling again on Wednesday to $347.51 per share!  On Thursday, it gave back a lot of those gains and finished the day at $193.60, down 44%.  However, still up a whopping 928% through January 2021.

 

What caused the surge?  There is a subgroup in Reddit called “WallStreetBets” comprised of a few million people containing multiple discussions or threads with ideas for the next trade to jump on.  This group encouraged each other to keep buying GameStop in an effort to increase the price per share.  But this alone did not push the stock up almost 1,000%.  A big reason for this movement is how deeply hated GameStop’s stock was by hedge funds and other professional investors on Wall Street.  Much of Wall Street was betting on the fall of GameStop by “shorting” it.

 

What is a “short?”  In a short sale, the investor borrows a share of stock they believe will decrease in value and immediately sells it.  As part of this agreement, the investor is required to return the borrowed stock by a certain named date.  If the stock price goes down as expected, they can buy the stock at a lower price and keep the difference as profit.  This gamble is how investors make money from a stock falling in price.  However, if the stock price goes up they are forced to purchase the stock at the current market price.  Of course it is important to note that the risk of loss on a short sale is unlimited as a stock price can only decrease to $0 but could theoretically increase to infinity. 

 

Ok, I understand a “short” but what is a "short squeeze?"  This is what happened last week.  When a stock is heavily shorted, a rise in its price can force short sellers to get out of their bets.  To do this, they have to buy the stock at the current price which pushed the stock price even higher.  As GameStop’s short sellers have been squeezed this month, retail investors have kept the momentum going thereby driving the price higher. 

 

Brokerage firms have been making it easier and cheaper for the retail investor to get into the market and trade.  In the last decade, trade commissions have dropped to zero and people can now trade on their phones.  The type of trading we witnessed last week is high risk.  Sometimes high risk can lead to high reward and sometimes high risk can lead to deep losses. 

 

Here at Rembert Pendleton Jackson we are aware of this type of trading but do not practice it on a daily basis.  Our philosophy continues to advocate participation in the markets with a globally diversified portfolio as a prudent strategy for the long journey.

 

Source:  AP News, Yahoo Finance

 

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