Flash mob in the stock market: how small investors drive prices up

The stock value of a fairly insignificant American company has risen by as much as 3800% in a very short time.

These strong price advances are not normal, and the strange thing is that the newspapers are from Gamestop, a rather insignificant company that is not doing particularly well. The Texas retail chain with branches in Switzerland and Germany sells computer games and entertainment software in stationery stores. It is a business model whose future is being questioned given the increasing digitization and the rise of the online business of suppliers such as Amazon or Walmart.

There are two reasons. On the one hand, hedge funds have identified Gamestop’s structural problems. So-called short sellers assume that Gamestop will earn less and less in the future, and that the share price should go down for this reason. Based on this consideration, they borrowed Gamestop papers from others and sold them, then bought them back for less. The difference between the high sale price and the cheap buyback would be your profit.

Some retail investors don’t like what Wall Street is doing, and especially short sellers. They found like-minded people on information platforms like Reddit on the Internet and encouraged each other to take down “the greedy and evil hedge funds” by buying shares in Gamestop in droves. Something like this is possible today because information can be exchanged cheaply and quickly on social media, because the securities of young brokerage firms like Robinhood can be traded easily and cheaply like in a computer game, and because banks Centrals give the impression that price reversals are about to avoid almost any price.

The sudden rush of stock buying has given Gamestop share prices a strong boost. Short sellers had to react to this and buy back more and more paper that they had previously sold, otherwise they would risk huge losses. In this way they have intensified the price explosion that has just begun. And as if that wasn’t enough, so-called call options were also involved. Sellers of these special futures contracts also had to stock up on Gamestop stock more and more as prices rose, leading to a perfect bullish storm. In fact, the price went from $ 17 to $ 483 in two and a half weeks.

Of course not. Because the stock is only worth a fraction of the maximum price when you consider Gamestop’s earnings prospects. The enormous dimension of speculation can also be seen in the incredible price fluctuations. On January 27 alone, it lost up to 80% of its value over the course of the day, just to make up for a part.

You can think of Reddit as a kind of huge internet forum. Many members travel there anonymously. Anyone can write and comment on posts that consist of a link, image, video, text, or a poll. More than 50 million people were active on Reddit every day in 2020, 44 percent more than the previous year. The last discussion sparked the r / wallstreetbets subreddit. More than 8 million private investors have gathered there since 2012 to brainstorm unusual investments and make quick money.

You can discover the most important things about Reddit here.

As soon as the situation has calmed down a bit, the share price should drop significantly again. As of April of last year, Gamestop papers were still trading for less than $ 3. Anyone who has gone cheap in the spooky hype of the past few days and sold on time will hopefully have made a substantial profit. However, anyone who has been tempted by greed and hope at a high price and then found another “stupid” who buys the papers at an even higher price, must expect great losses. Ultimately, this is pure speculation and not a sensible investment.

They are strange accusations. After all, brokers have to back their activities with capital, and that can be limited with large volumes of trading. They also want to prevent many of their clients from falling into financial ruin. Because at the end of the day, they would probably be left with the associated losses.

In most cases, it is more about promoting a certain political agenda, such as the introduction of taxes on transactions or wealth, than about the efficiency of the market mechanisms themselves.