A lesson in risk from Gamestop

Gamestop stock value
A lesson in financial risk, from Gamestop

How does a small Texas-based company, which owned video game retail outlets, go from being relatively mainstream to being splashed all over the media? The answer, in short, was their short-selling activity. Short Selling is nothing new and is when investors borrow shares and sell them, hoping to repurchase them at a lower price and drive the price up.

 

As of last month, the struggling second-hand game store was only really known to its regular customers. This was until an eagle-eyed user on the forum based website, Reddit spotted that the total number of shares sold on Gamestop was significantly larger than the shares on issue (more than 100% of the company). The observation caused a storm and quickly rallied an army of supporters, in the form of small investors called the ‘Wall Street bets’ who all themselves went on to buy GameStop shares. The result was a social-media-driven trading frenzy, (fuelled in part by a tweet from Elon Musk) which proceeded to propel struggling stocks to implausible highs. Almost overnight the users of Reddit (and so-called amateurs) managed to push stock prices up to $350 and had professional investors and Hedge Fund managers alike, crying out to be saved from the significant and impending losses. All of this, remember was caused by a crowd of small individual investors.   

 

So why is this significant? More than an underdog story, the Wall Street bets, managed to outwit the actual Wall Street. Hedge Fund Managers had pegged Gamestop to drop in value, so the fact the Reddit based army, swapped tips and bought shares in GameStop, caused Gamestop’s share price massively, which frankly, nobody saw coming. Everyone who had banked on it dropping in value had to repurchase their shares, losing significant amounts of money in the process. Concerns that what originally started as (seemingly) a bit of fun, almost has a vigilante feel to it and some said it was to get revenge for the 2008 financial crash. What it does mean, is that the long term decline in individual investment might now be turning, with the ‘Gamestop effect’ boosting the silver market and other commodities.  

 

Short Selling is by no means a long term strategy, particularly if you are looking for low risk and a stress-free approach. As with this example, it requires daily dedication to watching the markets, quick reactions and a tremendous amount of gut feeling to stay on top. The decision of whether to take the plunge is entirely dependent on your level of adversity to risk.

 

If you would like to discuss your financial goals with us, please get in touch at [email protected] or by calling us at +44 (0)1444 715200

 

This article is for general information and is not intended to address your particular requirements. No individual or company should act upon such information without receiving appropriate professional advice