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What is happening with GameStop? Questions answered amid Reddit stock market meltdown

Mirror logo Mirror 29/01/2021 11:23:30 Emma Munbodh

Shares of US retailer GameStop rocketed this week after a group of amateur traders targeted the gaming chain, causing professional Wall Street investors to lose billions of dollars.

The high street giant, which was struggling financially, was caught up in a "short squeeze", triggering an internet meltdown.

And many of those who took a gamble have made some serious cash - despite knowing very little about how the stocks and shares market operates.

Wall Street commentators have called it a "phenomenon", "insane", and like "nothing [they've] ever seen".

If you're seeing the headlines and wondering what is going on - and whether you should invest - here's what you need to know.

Anyone thinking of putting money down should firstly be aware that stocks and shares is an incredibly volatile business.

Your investment can crash as fast as it can rise so make sure you know the risks and can afford any potential losses well in advance.

Are you involved in GameStop? Get in touch: emma.munbodh@mirror.co.uk

What is GameStop?

What's happening with Gamestop? Your questions amid Reddit stock market meltdown © NurPhoto/PA ImagesWhat's happening with Gamestop? Your questions amid Reddit stock market meltdown

GameStop is an American high street gaming chain that specialises in video games, consoles and technology.

Like many physical retailers, it's been struggling since the start of the coronavirus pandemic, with its financial troubles exacerbated as consumers turned to online shopping.

In fact, the 37-year-old chain recently announced plans to permanently close 450 stores.

That's of course before its shares started to rocket online - a move that some say could change its fate entirely.

What is the GameStop drama all about?

a person sitting at a table using a laptop: Could this mark the revival of GameStop? © GettyCould this mark the revival of GameStop?

It's all linked to a forum called 'wallstreetbets' on an online social media platform called Reddit.

The forum has around 4million members who are regularly discussing stocks and shares and where they're going to invest their money next.

Over the past six months, accelerating in the past few weeks, its users have zeroed in on one main stock - GameStop - and a tactic involving the "short squeeze".

On the stock market, you can bet on a share price falling rather than rising, by "borrowing" shares and selling them at the current price, with the obligation to buy them at a later date, at whatever price they have then reached.

GameStop, before the frenzy, was one of the most shorted shares on the US market, as a range of funds bet that it would slump during the pandemic.

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But in the past few weeks and months, Reddit users started buying in.

GameStop's low share price, thanks to the shorters, made it relatively easy for a large number of people to get involved with little money.

As the share price rose and rose, more people bought in - both to trigger the short squeeze, and because the price itself was now a way to make money.

It drove GameStop's share price up by more than 700% in a week.

Professional traders who shorted the stock now need to buy the stock back to fulfil their obligations under the short - which will drive the price up even further.

As a result, they've lost billions, causing an entire hedge fund to go bankrupt.

Why did people invest?

For some, it was purely for entertainment (some investors even donated their gains to charity), for others, it was a revenge attack on Wall Street. In other cases, it was simply a chance to make some serious money.

What happened to shares this week?

a cake sitting on top of a wooden table: They grew - by a lot © GettyThey grew - by a lot

Shares in GameStop soared by a staggering 359%, from $96.80 (£70.83) to $347.50 (£254.25).

In fact, shares have risen by an incredible 10,692% since April 2020 when they were priced at just $3.25 (£2.38).

It means investors who bought at April's low price and sold them this week would have made a profit of $344.25 (£251.88) per share.

Can I invest?

Some trading brokers, including Robinhood and Interactive Brokers, have been forced to stop taking on new customers while they deal with a backlog in demand.

Investment platform Trading 212 said: "Due to unprecedented demand, we have temporarily stopped onboarding new clients.

"Once we process the existing queue, we will be open for new registrations."

Should I invest?

Investing is essentially gambling and there are no guarantees that your money will generate any returns.

In fact, there's a significant chance that share prices will fall, meaning that you'll make a loss.

GameStop shares have already started to go down in value despite the hype. The Reddit forum has also been temporarily closed.

Highs don't last forever, and often a short squeeze ends in prices dropping back to where they were before, although after how long varies.

Rick Eling, investment expert at Quilter, said: " When a stock market story goes mainstream, there can be a feeling of missing out. However, buying any one single stock is incredibly high risk and as this stock in particular surges you will more likely than not lose their money. Bubbles always burst.  This is as true today as it was in the USA of 1929, the UK of the 1700s, or the Holland of the 1600s. Greed doesn't change.

"Familiarity with a company can give a false sense of its risks. If people once owned a Nokia, or shopped in a GameStop, they might feel more comfortable speculating on these firms.

"The GameStop situation is far from being just about investment, but it is bringing attention to the power of investing. Figures from the Bank of England show that excess savings of about £100bn have been built up by UK households during Covid-19. The temptation for bored people stuck at home to "play the markets" on an app is real, but many will find out to their cost that there is no free money.

"Investing is powerful, but like most things, it only works for you if you know how to use it. If you wanted to get started investing then the best option is to choose a diversified multi-asset fund. An adviser can help you find something that suits your risk profile, your ESG preferences and more."

vendredi 29 janvier 2021 13:23:30 Categories: Mirror

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