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Pandemonium characterized the financial markets last week as US hedge fund giants were caught with their pants down by a new class of social-media-driven investors who exploited their brazen over-short of the now infamous GameStop stock.
The GameStop share price has seen a major correction since the highs of last week, leaving latecomers wondering: is the party is over, or should you buy GameStop stock at these lower prices?
Here at nextmarkets, we aim to provide you with all the details you need to make an informed investment decision and show you how to buy GameStop stock and other stocks we have on offer.
Hedge funds bit off more than they could chew
Hedge fund representatives attempted to secure a successful short by disparaging the stock in interviews to instil negative market sentiment around the stock to encourage a sell-off. The problem was that these hedge funds had made a major miscalculation by shorting 120% of the available stock which in the event of a short squeeze would drive prices extremely high as the hedge funds attempt to close their position but are prevented from doing so by limited stock supply.
The WSB Reddit community recognized the hedge fund strategy and miscalculation and countered it by pooling their resources and initiated a short squeeze by buying the GameStop stock in mass. The showdown made international headlines and ignited social media platforms leading many to join the WSB cause and buy GameStop shares with a rapid snowballing effect. The Wallstreet versus Everyone frenzy was in full force with many hailing the event as Occupy Wall Street 2.0. in reference to the protests on Wall Street after the financial crisis.
The stock price exploded last week from $76 on Monday the 25th of January to $480 by Thursday the 28th. It was during this parabolic rally that Robinhood, the most used trading app during the debacle, decided to prevent users from buying GameStop shares, among others, only enabling them to sell it. Many have regarded this action as market interference and an attempt to shield the hedge funds. Robinhood has claimed the drastic increase in transaction volume of these stocks forced them to temporarily freeze the stocks in order to meet liquidity regulations.
If you wish to trade without fear of your favourite stocks being frozen, join us at nextmarkets, we offer free stock trading app bespoke to your trading needs. Whatever the case may have been, at that point, it was too late for the hedge funds that had closed their positions. Melvin Capital was the highest-profile hedge fund and had to be bailed out for a whopping $2.2 billion. The GameStop share price has since endured a major drop and is currently trading around $70.
At this point you may be wondering, GameStop stock: buy or sell? Nextmarkets provides expert insights that can help inform your decision under the ‘future outlook’ heading.
GameStop stock - Buy or Sell?
GameStop stock became the unlikely battleground for an unexpected clash between US hedge funds, most notably Melvin, and a Reddit group called WallstreetBets (WSB). This section provides context for those out of the loop and those in need of a refresher. Three factors precede the events of last week that help put it all into perspective.
First, is the long-suspected and ever-growing notion of a protected financial class that is able to engage in market manipulation and excessive risk-taking without fear of consequence. The 2008 Financial Crisis was the watershed moment when these suspicions were validated as major banks and investment firms instrumental to the collapse were bailed out while millions of ordinary citizens lost their jobs and homes. This injustice is still fresh in the minds of those directly and indirectly affected and reinforced in culture by popular films like Too Big to Fail and The Big Short which laid bare the double standard that exists for the government-backed financial elite. A ripe antagonism towards the rigged financial system underpins the fortitude and determination that drove an online community to take on a giant hedge fund.
Second, is the mass adoption of social media and online trading sites/apps. Online trading platforms have been around for a while, steadily gaining popularity as the tech becomes more accessible and user friendly. Online applications enable virtually anyone with a mobile device, access to the internet and some disposable income to become investors in the stock market.
With the advent of Covid-19 in 2020, many found themselves isolated in their homes looking for ways to pass the time and make some money. Many turned to social media sites like Reddit and YouTube where a massive online investment/ stock trading community was building, which in tandem with trading apps proved monumentally empowering for the individual. The collective input of individuals in the community greatly reduced information asymmetry barriers and enabled resource pooling and strategic coordination. It is these factors that enabled the WSB message board on Reddit to quickly coordinate a counter-strategy after users revealed that Melvin had over-shorted GameStop and were attempting to manipulate the market into dumping the stock and thereby profit from its demise.
Third, nostalgia and memes. Covid-19 wreaked havoc on the global economy – the retail sector, in which GameStop operates, was especially hard hit as lockdowns prevented or discouraged people from purchasing goods in physical stores. Consequently, Tesla and FAANG stock prices recorded all-time-highs while Main Street struggled to keep head above water. If you too would like to buy shares in FAANG companies, our site nextmarkets is the perfect place to buy Tesla stock, buy Facebook stock and buy Apple stock – commision free!
It is no secret that the internet loves gaming and it would not be a stretch to imagine that much of the energy surrounding GameStop is nostalgia-driven. Hedge funds seeking to profit from GameStop’s downfall met the wrath of a galvanised Reddit community armed with trading apps and trending memes. A snowball effect ensued as WSB’s coordinated effort to the naked short gained widespread support and resulted in a successful short-squeeze, with many hailing the effort Occupy Wallstreet 2.0.
Should you buy GameStop stock?
The share price of GameStop is currently in rapid decline, trading around the $70 mark at the time of writing. The massive share price spike was a collective attempt to punish large institutional players for their reckless trading strategies rather than a true reflection of the underlying value of GameStop. One of Gamestop’s highest-profile investors, Ryan Cohen, aims to direct the company’s focus to online sales, which is promising, however they face stiff competition if they remain a middleman between the consumer and the game developer.
Whether GameStop can bring something unique to the table to get a competitive advantage will determine if their current share price can be justified. However, they will need to act quickly to capitalise on recent attention. The events of last week have revealed GameStop as a brand that is beloved by many, the duration of investors’ love for the GameStop as a stock on its own merits is rather dubious. If you are currently invested in GameStop, be very careful with this high-risk asset and pay close attention to movements in the market as downside risk warning lights are flashing.
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Our thoughts on GameStop stock
The GameStop fiasco was a phenomenal event in the world of finance that showcased the powerful influence strategically coordination individuals on social media can have. Predictably, once the short-squeeze was successful in getting hedge funds to close their short positions, the share price dropped precipitously – this trend is likely to continue to earlier January levels unless GameStop is able to capitalize on the recent attention with a big announcement. GameStop’s newfound meme status may result in random future pumps driven by hype on social media but any hopes of long term growth will rest in GameStop’s ability to adapt and establish itself online by offering something unique that Steam and Amazon cannot.