You’re aware of all the fuss over the American retailer GameStop where its share price rocketed after some investors on social media ganged up to push it up? Now it is happening again. The price rose by 104% overnight so I’m republishing this article that I wrote on 3rd February.
The piece also covers how the Reddit crowd tried to do the same with silver – the shiny metal that has been gold’s poor relation for so long. It didn’t work so well…
- What’s behind the GameStop share price rise?
- What’s happening with the price of silver?
- What is the future for social media trading groups?
It’s like the Wild West has hit Wall Street.
Well, to be fair, Wall Street has always been a bit wild. Stock markets tend to be. But what’s been happening with Game Stop and a few other companies recently has been particularly wild!
Firstly, there’s been a lot of activity in American and other stock markets during the pandemic as a lot of people have had furlough money and not much to spend it on so many decided to pour it into stocks and shares. That has meant that there has been more activity on the stock market over 2020/21 generally.
But there has also been more chatter about investing on social media platforms, particularly Reddit where groups of investors have been excitedly discussing how they want to bring down some of the big financial houses – particularly hedge funds. The way they have attempted this is by doing a ‘short squeeze’ on companies and products that these hedge funds have been trying to ‘short’ (see below for definitions).
This has meant that when a few big hedge funds decided to ‘short’ the stock of a chain of shops called GameStop last week, the traders on Reddit calling themselves Wallstreetbets piled in to the stock, buying it (often with borrowed money) in droves in order to push the price up and make the hedge funds lose money. And they did!
This seems to have happened again on February 24th when GameStop shares went up again, this time by 104% and, interestingly, Reddit crashed for a short while.
What is ‘short selling’?
Short-selling is where an investor bets that a share will fall. They do this by borrowing the share (stock) and selling it (even though they don’t actually own it), hoping to buy it back at a lower price later. The difference between the price they sold it at (the high one) and the price they bought it at (the low one) means they should make a profit…on something they didn’t even originally own!
There’s a good video here that explains the process quite clearly.
Why would anyone take such a risk, you might ask? Mainly because it means there is a possibility of making money even when markets are dropping. It’s pretty easy to make money when markets are going up – you buy and at some point sell at a profit. But it’s much harder when they are going down. But if you can sell and then buy on a falling market you’re almost guaranteed a profit (although it is very risky).
what is a ‘short squeeze’?
A ‘short squeeze’ sounds like something a bit fruity, but it’s not!
A short squeeze is where investors try to ‘short’ a stock but other investors realise this is happening and decide to raise its price instead. If the ‘squeezers’ manage to do that then the price goes up and the investors who were hoping to short the stock then lose a lot of money. This is because they had sold it high expecting to buy it back at a lower price but end up having to buy it back at a higher rate. That means they actually lose money instead of making the profit they had hoped for.
So now, flushed with success, the traders on Reddit are trying to do the same with silver that they did with GameStop.
There have been rumours flying around these chat rooms for a while that hedge funds have been artificially driving down the price of some precious metals, particularly silver. so they have now been piling into silver ETFs (Exchange-Traded Funds) to push up interest in silver generally.
It worked at the start with silver rising to 11% above where it was last week, but it doesn’t look like they will be able to sustain the rally. Silver is quite a wide market with a lot of players dipping in and out. It’s harder for a smallish group of determined traders to manipulate its price for long.
Don’t knock it – these groups can do each other a lot of good, although they have the potential to harm their own wealth and mess with the markets if they really go off the deep-end.
It can be useful to join a group of other investors on social media to get ideas and even some inside knowledge here and there. A new social media site called Clubhouse has ‘club rooms’ for investors and could be worth checking out. Also, of course, Reddit has shown itself to be a force for investors.
Ultimately, though, I’m a proponent of contrarian investing and going against the crowd rather than with it. I think crowds can go mad more than they can be wise, so keep a bit of a mental and emotional distance from the ‘ra ra’ rallying cries of any investing group you find yourself in. Ultimately, do your own research, make your own mind up and don’t be swayed by what others suggest in the heat of the moment.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.