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GameStop: is it only the beginning?
Information is not investment advice
It seems like the recent drama between the Reddit users and Wall Street hedge funds has cooled down since the start of this week. If you’ve missed this train, catch up with the article on the FBS website.
In just five days the Gamestop stock made severe falls to the area where the hype had begun. On February 3, the stock was already 5 times less than its all-time high. Still, a quick glance at the r/Wallstreetbets board tells us that people are hoping for a second spike to the upside.
So, who are these Reddit people, a bunch of losers or revolutionists? We’d say they are neither former nor the latter. They tried to make money fast and some of them did succeed. Others participated just for fun.
In this article, we will dive into the depth of retail trading’s history and make a retrospective analysis of stocks that boomed during the dot-com era. It will help us to answer the main question: will the rise of low-potential stocks continue? Should you join this trend?
What the fuss is about
If you haven’t read the article about GME performance, we highly recommend you to do that. In short, traders from r/Wallstreetbets started to buy the stocks of Gamestop – an American shop chain, beloved by everyone, but very unsuccessful. The hedge funds from Wall Street held short positions on the stock, as they expected it to fall. Unexpectedly to everyone, the stock started surging, thanks to the Reddit users. This led to a short squeeze – a situation in the market where sellers have to buy a stock at a more expensive price, causing it to go higher. A literal shock made hedge funds lose millions of dollars and even provoked Robinhood, a famous American trading platform, to close access for buying the GME stock. That was when the scandal reached its top point. Many analysts, politicians, businessmen, and even Elon Musk himself claimed the Robinhood decision as unfair. Critics referred to the connection between Robinhood and Citadel Securities that could have led to market manipulation. Both companies denied that, though.
It’s worth mentioning that GameStop was not the only target of Redditors. Other stocks that experienced gains are AMC Entertainment, Blackberry, and Bed Bath & Beyond. The retailers bought silver last week as well, pushing the precious metal to August's high.
History of short squeezes
We aren't going to tell you about the Tulip Bulb Mania that happened in the 1600s when a fellow Dutch botanist overvalued the price of a tulip bulb and made everyone go crazy about it. (just like with Gamestop!)
Today, we’d recommend you to look at a more recent example. Back in the late 90s, early 2000s a lot of stocks boomed amid the dot-com popularity. People invested in companies without properly looking at their fundamental bias. Companies’ valuations skyrocketed, but their potential was low.
Another example is even closer to current realities. There were sites similar to Reddit boards back in the 1990s. One of them was siliconinvestor. In 1996 people tried to pump a stock of a tech company Zitel that was expected to fix the Year 2000 problem. The price indeed spiked in the short-term on the rumors about potential investments by George Soros. Now it's almost impossible to find any data about this stock later than from 1998.
So, as we can see it's not the first time people try to milk money out of low-potential stocks. Was it worth it? For those who were lucky enough and treated the market as a casino, yes. Others, who just followed the crowd, most likely did not succeed.
The Gamestop situation creates an unprecedented case for big companies and institutional funds. That has happened because social trading has become extremely popular in recent years. Now, companies are monitoring the Reddit board in an attempt to find the next retailers' target. According to Thinknum Alternative Data's tool, there are Nokia, AT&T, and Toronto Dominion Bank among the most-mentioned companies in the board.
At&T is the next to rise?
Should you join this crowd?
If you think that you want to gamble, then why not? However, gambling is not about true trading. In the former case, you trade stocks of companies that are likely to go bankrupt in few years. As for trading, you make your decisions based on fundamental and technical background. As people have noticed, retail traders sometimes lose their capital even more when they try to outplay the Wall Street giants.
All in all, people believe in their power. Reddit traders keep holding the GameStop stock in hopes of the second jump, while analysts keep wondering about their next target. Will it be AT&T?
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