Last month was a historical moment in the finance world. For the first time, retail investors took control of the market. They stole the reigns from hedge funds and corporations through a short squeeze. For once, the people had the power.
GameStop was the unlucky target chosen for this massive bloodbath between hedge funds and retail investors. It’s been known to be a heavy target for short sellers, betting on the company stock declining. It’s no secret the company has been having issues maintaining relevance in a digital age. Used video game and new game systems sales seemed to be somehow keeping them afloat.
So what happened? If you haven’t watched the news or still confused, Reddit users began promoting the stock, getting more and more people to invest in the company. The more people invested in the stock, the higher the price climbs.
This triggered panic among the short sellers, causing them to close their positions before they lost more money. This is called a short squeeze, propelling the stock to climb even higher that what was thought possible.
People made millions, while hedge funds almost lost it all. As a result, there will be countless hearings and investigations to see what exactly happened, how to prevent something like this from happening again and if anyone did anything wrong.
So there are 3 things to take away from this:
A High Price Tag Isn’t Always A Good Thing
If you weren’t on the Reddit thread, you likely heard about this short squeeze a few days after it happened. Which means you weren’t there until closer to the end of this massive spike. Those that made their fortune walked away from their position, while eager and hungry people wanted a piece of the pie, and greed started to take over.
Young and amateur investors may have been caught up in the parabolic rise of the stock price, but never realized they needed to cash out before it was too late. As a result, many people lost the fortune they earned. The stock had been volatile and many people either never sold their positions soon enough, got blocked by Robinhood or came in on the stock decline.
This event started a trend for kids and amateur investors to look at investing as gambling and finding ways to make a fortune with little to no effort. I ranted about that in last week’s blog post.
Short Selling Is Very Risky
Because GameStop stock is far too overpriced, many people have started to short the stock, expecting it to come crumbling down. While this may be true, the risk of shorting a stock is a very risky move.
When you invest in a stock, you can earn an unlimited amount, but you can realistically only lose the money you initially invested with. For shorting stocks, if the stock price rises instead, you need to pay back the difference.
The higher a stock price goes; the more money short sellers stand to lose. It’s a risky and expensive move to make for investors. This short squeeze was no exception.
Do Your Research Before Investing In A Stock
It was no surprise GameStop has been struggling. They had previously announced they were going to be closing 1,000 stores by the end of the year. The high price tag of its stock is not an indicator of the company’s health.
Instead you should do your research and find companies with a good business model and has a promising future.
These short-term trends kids on TikTok and day traders are promoting is risky. They want to make money over a matter of hours or days, while long-term investors make money over the course of years. Long-term investing is a safer choice and the more realistic path to take. Trying to make money on such short-term basis is very risky and requires the knowledge to read trends and charts.
I would have had loved to take part in the GameStop short squeeze, but my money was being invested into long-term stocks and cryptocurrency. I’m up 38% this year and can’t complain.
