Stock Market Bonanza – Life After the GameStop Fever

By: Henry Sacra

TL;DR – Read if you understand the stock market and grasp these terms:

Pump and Dump, Shorting, Hedge-fund, Ticker

Otherwise, you may benefit from reading the whole article.

  • Is GME still profitable? [ANSWERED 3/7/21]
    • If the price of any stock rises above the value you bought it at and you sell, you have completed a profitable trade.
    • Almost any stock can be profitable if you don’t buy it while it is very high value and plateauing or continuing to rise. Patience and research is key.
    • There is still hype surrounding GME, so the perceived value is still high. This could make the stock more bullish and in turn, more profitable for those who wait. It is impossible to speculate with 100% certainty, though.
  • Will occurrences like this ever happen again?
    • It is possible that what has happened with the GME stock will become illegal. A coordinated pump and dump like this would be really hard to stop, though. Rather than just a few executives at a company doing it, thousands upon thousands of social media users are doing it.
    • GME is still active and is “being pumped”. AMC is also a stock currently being pumped, although less bullish than GME as the hype there is still large.
    • GME will most likely be bullish so long as the hype around the story exists and people hold the stock. The price of GME fell and immediately shot back up because of the stock’s current perceived value (aka hype).

Everything was so sudden – within the blink of an eye, the dying retail company GameStop’s stock soared. In only (just under) half a month, the stock skyrocketed above twenty times the mean value it held for many, many months. Why and how did this happen? The answer would point to clever internet users. 

On the website known as Reddit, a board (or subreddit) known as Wall Street Bets existed. The members of Wall Street Bets used stock trading as a way of “strategic gambling” in hopes to make money or cause financial havoc for large hedge funds.

A user realized that hedge funds were “shorting” the publicly traded stock GME, or GameStop (GME is the ticker, or the shortened name for GameStop in the market). Shorting, in layman’s terms, is predicting that a stock will go down and placing money on that prediction. With this, a hedge fund is just a massive asset management company that manages stocks and typical investments in mass. If the value of a stock goes up while you place a short on said stock, you will lose money when closing your position on the trade (leaving the trade). 

The user’s thread commanded the users to buy the stock, and they did. In just 10 days, the price of GME skyrocketed from roughly $20 to roughly $347. Throughout these ten days, heads turned. Some people saw this as an actual attempt to hurt the hedge funds (hint – it did), although others saw it as an elaborate pump and dump scheme. 

The stock jumped from roughly $40 to roughly $350 in only 13 days.
Data and Graph provided by TradingView

A pump and dump scheme is typically defined as a scheme where a company (or the people in the company holding the most stock) lie about a stock’s value and create hype around the stock. This causes the perceived value of the stock to soar and for people to buy into the stock, causing the price to rise. The people who are buying the stock are typically tricked into believing they will sell and that the value will continue to climb because of the substance of the company behind said stock. This is the pump. 

Regardless of the circumstances of which GME was “pumped”, you can see the extreme spike in value (outlined by the red line). Notice that this spike begins around the time the stock is being hyped.
Data and graph provided by FinViz.

The dump, though, is what truly makes this a scheme. The people in the company who hold a majority of the stock sell all of it when they feel the stock is at the peak price it will reach. They take the money, and since so much of the stock is now sold and circulating, the value goes down. This causes the stock to plummet in price and now all of the people conned into buying the stock have a stock that is essentially worthless and sometimes even worth less than what they bought it at (especially if they bought in the middle of the hype). Although, there is something different about the GME pump and dump theory – the little investors are the ones pumping, and the hedgefund are the ones losing millions of dollars on their short.

Here, you can see a “dump” (outlined by the green line). Again, although not a typical “dump”, you can see that as the stock is sold in mass, the price drops. This is regardless of the holder.
Data and graph provided by FinViz.

It is hard to consider this a pump and dump when the clear intent of the call to action posted was to drain hedge funds. In fact, buyers were encouraged to hold the stock so the value continued to go up. The most notorious loser in this situation was Melvin Capital Management, a hedge fund based out of New York City. They were shorting a lot of money on GameStop because of the decreasing popularity in physical game stores and increasing popularity in digital game distribution services.

MCM lost 53% of their total capital and ended the month with around $4,000,000,000 lost. Of course, other hedge funds were hit hard too. With this, the redditors and traders participating in this made millions of dollars. Now, after all of that is GME still profitable? Will pseudo-pump-and-dumps ever happen again?

To close, a warning is warranted:

  • Learn before trading. Never go into the market without knowledge.
  • Always wait and observe trends before jumping on them.

And finally, almost nothing is profitable if you really don’t know what you’re doing.

Sources:

https://www.investopedia.com/terms/s/shortsqueeze.asp

https://www.investopedia.com/ask/answers/12/what-is-a-stock-ticker.asp

https://www.investopedia.com/terms/p/pumpanddump.asp

https://web.archive.org/web/*/https://reddit.com/r/WallStreetBets

https://www.cnn.com/2021/01/31/investing/melvin-capital-reddit-gamestop/index.html

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