NO! Let me start with just a “no” you should not get in and I would highly recommend staying away from this stock. Just watch from the sidelines. It is extremely volatile and has way too much risk. Plus, my overall strategy is more of the slow and steady to financial freedom.
On Tuesday, January 26th, GameStop (GME) closed at $76.79 after shooting up into the $150s per share yesterday. You will first have to remember that GameStop has been on a slow decline over the last 5 years as consumers have changed their shopping patterns and the brick and mortar retailers have taken a hit. Plus, as more gamers start embracing digital downloads of games versus the physical disc, GameStop gets a double dose of trouble. GameStop was recently trading as low as $2.80 per share (on April 3, 2020).
So, what is going on? Well it has everything to do with the Hedge Fund Managers shorting the stock. Short Selling “is an investment or trading strategy that speculates on the decline in a stock or other securities price. It is an advanced strategy that should only be undertaken by experienced traders and investors” (source – Investopedia). It is a strategy if you think the company could go bankrupt and you could potentially take advantage by short selling for a profit. However, what happens if the stock does the opposite or has a massive upside? You could be caught in a very tough position and face the wrath of severe, unlimited losses.
Welcome to Reddit and the WallStreetBets subreddit community which currently has about 2.5 million followers. Many of the WallStreetBets members are young retail investors that use the popular Robinhood mobile app to trade stocks and options. They generally talk about the stocks they are investing in and share their results of such investment. With the large Short Sells being public knowledge, this group decided to discuss the possibility of purchasing GameStop (GME) in an effort to short squeeze the stock (sticking it to the big guys — the Hedge Fund Managers) which pushed the stock price up drastically; especially as the Hedge Fund Managers then tried to buy in to cover their losses. They are now in a position to lose massive amounts of money and possibly going bankrupt themselves. As of yesterday, Melvin Capital (the primary Hedge Fund Manager shorting GME) is in a world of hurt and had to seek outside help in the amount of nearly $3 Billion (from Citadel and Point72) to try and shore up Melvin Capital’s losses. Yesterday GME closed at $76.79 and today’s premarket is $248.73 as of this writing (at 7:30a EST). It is a true David vs. Goliath and GameStop is in the middle… and so are your dollars if you risk trying to play the game.
This is all overly complex and I found two news clips to share and a pretty good video explanation on Short Selling if you are interested.
If you want to better understand Short Selling, I thought this video from The Plain Bagel does a pretty good job in about 10 minutes.
As much as I would love to jump in, play the game, and try to make a quick buck, it isn’t my strategy and it is too risky for me to throw any amount of money towards GameStop (GME). Also, keep your eye on a few other companies that have large short sells listed including Bed, Bath, and Beyond as well as AMC amongst the list.
Leave a Reply