The Rise and Subsequent Fall of GameStop - What Can Investors Learn?
Now that the craziness of the GameStop, Reddit, and Robinhood scandal has settled, I think now is a good time to do a refresher on some lessons learned for those of us investing in the stock market.
So today, I’m going to unpack what happened with GameStop, what you can learn from it, and how you can apply these lessons on your journey to financial independence.
GameStop, Reddit, and r/wallstreetbets
This story began with the Reddit group r/wallstreetbets, a stock market subreddit with more than seven million subscribers. At one point, a discussion thread about GameStop had started in the group, particularly around the idea that GameStop was undervalued. Soon after, major hedge funds decided to short sell GameStop stock.
What’s short-selling you ask? Short-selling occurs when you bet against an overvalued asset with the assumption that its price is going to drop over a specific period. If this happens (if the investor accurately predicts the drop during a specified time period), the investor can see significant returns. This is something typically only done by savvy and experienced professional investors or hedge fund managers.
r/WallStreetBets, however, was a group made up of individual investors. This community of millions decided they were going to stand together and stick it to these hedge funds, and so they began a concentrated effort to drive the prices of GameStop up.
It quickly became a story of the little guy sticking it to big corporations, a modern-day David and Goliath if you will. In just one month, GameStop prices shot from a low of $17.90 per share at the start of January, to an incredible $379 by January 29th.
These are astronomical returns, and almost unheard of on the stock market, hence why the story received so much media attention. But now, almost one month since it’s high of almost $400, GameStop is now settling down - trading for less than $50.
So, what can be learned from what happened with GameStop?
A couple things . . .
1. Market Sentiment Matters
Market sentiment is the general mood and feeling amongst traders and financial markets. Market sentiment can drive the price of a stock up or down in a very short period, exactly as we saw with GameStop.
Market sentiment is important because when you invest in an individual stock, you need to know when your stock is fluctuating, and if those fluctuations are a result of market sentiment or underlying factors within the company. This knowledge should dictate how you respond.
Market sentiment is particularly important in this day and age, largely because social media (such as Reddit, Facebook, Twitter, etc.) can have a heavy influence on how people feel about a stock, thus influencing how they invest. You need to pay attention to how these changes can impact your investments.