You have undoubtedly heard the news about GameStop and AMC stock ballooning. At one point, GameStop's stock soared about 1,700%! Its share price started the year under $20 per share and hit $500 this week.
In light of this activity in the market, I want to make sure that I am reaching out to translate the headlines which may be confusing. So let me explain!
Gamestop and AMC are traditional brick and mortar shops struggling in a digital world who suffered immensely when the coronavirus pandemic hit. So some hedge funds assumed that these downward trending stocks would continue to move lower and shorted the stock.
The word short may lead you to think about Crisco or short cake….
But don’t let your stomach get the best of you. The technical term is “short selling” which is a fancy way of saying betting against a stock. An investor borrows a company’s shares, sells them to other investors and, if the price continues to fall as anticipated, then buys them back at a lower price. Pocketing the difference as a gain.
Stage left enters a Reddit message board with nearly 5 million followers called Wall Street Bets – where people share trading tips and ideas. They devise a plan to mess up this short seller strategy and started buying massive shares of GameStop stocks.
So what, you may ask? Well that meant the hedge fund managers had to buy back GameStop stock at a higher price then what they sold it for – losing billions of dollars.
So are you telling me that retail investors have outsmarted hedge fund managers? It appeared so and Wall Street was not happy.
Here’s where it get sticky. Stock trading apps like Robinhood and other financial companies, restricted people from buying GameStop stock due to “volatility” in the market. However, other established investors and hedge funds were free to trade the stock. This move is very concerning and has been highly criticized by many, including politicians like Senator Ted Cruz and Representative Alexandria Ocasio-Cortez, as it strengthens American rights to trade freely in a market.
While this all makes for an interesting story, the truth is that this is something of a sideshow and a far cry from the investment strategies most investors use to further their goals. My suggestion? Enjoy the show, but remember: you are playing for the long haul.
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