Millions of novice stock traders are pushing over some of Wall Street’s most experienced investors. They are targeting companies that big investors have written off, moving stock prices to unrealistic levels.
The primary focus is on GameStop, a struggling video game store. Its stock has so far risen by 1,600 percent this month, including Wednesday’s 120 percent raise. AMC Entertainment was up 225 percent, and BlackBerry is up over 250 percent this month.
These phenomenal gains are not due to traditional fundamental aspects value investors look for, instead are part of a frenzy scheme involving novice traders just pushing the prices up.
Tesla’s Elon Musk and the billionaire tech investor Chamath Palihapitiya have encouraged the Gamestop movement via Twitter.
— Yahoo Finance (@YahooFinance) January 27, 2021
Traders are scrambling to purchase options contracts that would benefit from a spike in the share price. And the selling will build a virtuous cycle that pushes up the underlying share values when financial companies that offer the options have to purchase shares as a buffer.
Together, these two reddit comments clearly explain what's going on with GME (GameStop stock) and how a subreddit is driving a multi-billion dollar hedge fund into insolvency. The explanation of short selling is especially helpful. pic.twitter.com/vFZWI9q70Z
— Lucky Black Cat (@1LuckyBlackCat) January 27, 2021
When more buyers seize options, brokers need to purchase more shares, triggering an unprecedented spike in the company’s asset values. GameStop started the year at $19 and started trading on Wednesday at about $350, twice the prior day’s close.
This dude on reddit invested ~$50,000 into Gamestop and his shares are now worth 48 million dollars.
That is madness
— DΞVN (@devncodex) January 27, 2021
Perhaps an explanation as to why stocks are so rapidly rising is that, until lately, they were actively targeted by major investors who predicted heavily that these stocks would plunge, by taking short positions. If the share value increases, the short-sellers have to buy the stocks in order to reduce their losses, and this causes a so-called short squeeze—a sharp rise in the valuation of the share.
Authorities at the Securities and Exchange Commission meanwhile are monitoring the online chat forums carefully for signs of possible market abuse, but they can only do that much without any obvious signs of fraud. If a large number of traders actually agrees to buy stock options at the same moment, out in the open, it is not enough to allege fraud and malpractice.
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