For those that haven't been keeping up with the extraordinary events on Wall Street this week, briefly stated, a large group of Reddit users on the page WallStreetBets were able to cause prices of select stocks to skyrocket, causing an incredible stir. These Reddit users, a.k.a retail investors, caused GameStop to surge 1,500% in two weeks. This massive drive caused a "short squeeze" of certain stocks. I will breakdown what happened, and show the true gravity and meaning of this week's events.
A group of Reddit users on the page WallStreetBets discovered companies whose shares are owned by institutional investors and hedge funds (the Wall Street "big money") and sea escorted by those investors for profit. This caused a rush of buying shares of these heavily shorted companies, which in turn causes the institutional investors and hedge funds to frantically buy shares, driving the price up, to unprecedented growth in both trading hours and after hours trading.
What is "Shorting a Stock" and a "Short Squeeze"
Shorting a stock is a method used to profit off of the sale of stocks and options in the stock market. Short sellers buy a stock betting it will fall in value. Short selling works like this: Short sellers borrow shares of stock from a broker. They then sell the shares in the market. The value of those shares goes down, and they buy those shares back at a lower price than they sold. They then return the shares back to the broker and keep the margin of price between the sell price and the re-purchase price. Now the short squeeze is caused when there is a lot of short sellers holding lots of borrowed shares they they must return. If the stock price then rises, it causes the short sellers to frantically buy more shares to cut their losses and get out. this frantic buying action causes the price to soar higher, forcing even more short sellers to buy. In extreme cases (like the events of this week) short sellers are frantically buying and tripping over each other to buy back as much as they can for as low as they can. This panic-buying causes even larger increases in the price. The short squeeze was put on by short sellers when the retail investors knew their position of power, and worked to cause even more panic to the institutional investors.
The Start of it All
At the start of the week, retail investors had already been eyeing Game Stop (Ticker: GME) and had gradually been helping increase the price. On Monday January 25th, GME opened at $119.92 per share, almost doubling over the previous weekend after hours trading. Monday saw the first peak of GME, and the stock closed in the mid 70s. By now, the mystique about GME and the short squeeze was just beginning. Other stocks also saw impressive increase, such as AMC (AMC theaters), EXPR (Express), BB (Blackberry), NOK (Nokia), and KOSS (Koss Corp.). On top of those, certain penny stocks such as NAKD (Naked Brand Group Ltd.) and SNDL (Sundial Growers), and the crypto that started as a joke, DOGE (Dogecoin). The overall interest in these stocks was very minimal, and they were largely off-the-radar except for GME. Except on Tuesday, when Elon Musk tweeted about GME, linking the WallStreetBets page and tweeting, "Gamestonk!!." He tweeted 8 minutes after makes close, and immediately the stock surged, causing the attention to increase, and Musk to fall into the line of fire with allegations of illegal "market manipulation." Naysayers said he carried too much fame and any tweet from him could control the market's prices.
The Middle of the Madness
By the middle of the week, GME had hit record-highs around the mid $300s, when this was a stock that went for $4 six months ago. Meanwhile, NOK was hitting it's plateau amounts of $6.65-$7.74, quickly falling to Monday levels on Thursday. EXPR did the same, rising up to a $13.16 peak, then falling after hours, resuming a gradual increase by week's end. KOSS was just beginning its climb. On Wednesday it opened at $14.83, then closing at $51.31 that day. NAKD had similar gains, moving from $0.351 at Wednesday's open to closing at $1.360. AMC had the most attention at this point, and the quickest gains. On Tuesday, January 26th, AMC closed at $4.940. On Wednesday, January 27th, it opened at $16.11, increasing nearly 400%. Throughout Wednesday and Thursday, it rode high on Wednesday, then took sharp spills to the $10 area on Thursday. All-in-all, the madness was well underway, and as stocks racked big gains, more eyes turned to Wall Street, and the adventure began its decline. If you were invested in the hype stocks, there is no doubt about it that Wednesday January 27th was the day to sell.The intensity began cooling off, while the heat began increasing due to outside pressures.
The Beginning of the End
By Thursday, everyone from NASDAQ CEO Adena Friedman to White House Press Secretary Jen Psaki to Alexandra Occasion-Cortez had made some mention of the situation, with Psaki stating the administration was "closely monitoring the situation." Also on Thursday, popular retail investor trading app Robinhood restricted all actions except selling on certain securities, including GME, BB, AMC, EXPR, NAKD, SNDL, KOSS, and a few other stocks caught in the short squeeze. This caused an uproar, as over 50% of people who hold at least 1 share of GameStop use Robinhood for trading. Robinhood stated this as an action to protect investors from the high volatility levels, which everyone else saw it as Robinhood blocking the retail investors while the institutional investors continued to trade the securities. AOC tweeted her outrage at this, and in an incredible move Republican Senator Ted Cruz responded saying he agreed with her sentiment. Right away, this was an obvious beginning to the end. The stars aligned siding with retail investors, which helped add fuel to the fire of the liberal "tax the rich" sentiment.
The Future of Finance
The events of the past week have caused millions to realize the true power of the market, the power of investors, and the power of Wall Street's Big Money institutions. Nothing like this has ever happened before, at the levels we've just seen. This has caused a re-evaluation of how every person at every level of the market operates and how they are regulated. New people are leaning of new ways to make money. A quick look at Reddit or the Stock Market trading severs on Discord show that there is still hope for a resurgence in prices and that stocks like AMC rebound and skyrocket, and crypto currency Dogecoin. We can be sure of nothing, and for all I know these securities will bounce back and climb even higher and faster than GME did. But the biggest lesson from this past week in market mechanics, is to Quit While You're Ahead, just like they say in casinos.
What should I do now?
If you want a little piece of the action, or are thinking about investing overall and not just in the pump and dump stocks that soared this week, consider a couple things. Perhaps the biggest lessons not just after this week but for investing any amount at anytime; Don't be greedy, and always have a plan. If you look at that $ or % gain and you like it but want more, proceed carefully. The best thing to do if you have doubts is to cash out. If you look at that $ or % gain and you like it but want more, proceed carefully.
Too often people will set a goal for how much they want to gain, and when they hit it, they change their mind and say "I'll take 10%" or "I'll wait and clear 15 more bucks." But when they come back to claim their higher earnings, their gains dropped. The second lesson is to always have a plan. This ties back to the gains amounts. Set either a target, a time limit, or any other way to keep you serious and focused. If you set a day as your last day to sell, stick to it. If you say you want to make $20, sell when you hit that mark.
Investing is an immensely complex thing, but one that can be followed easily when paying close attention. And if this week has showed us anything, it's that life can change in an instant. People have turned 5 figure investments into 8 figure investments over this week, and some have created even more. This week has changed the future of the industry forever. Whether it's for better or worse, time will tell.
- Reese C.