Wall Street was recently shaken up when young investors united through social media and created a bubble for GameStop share prices. This incident has led to many debates about regulations and access to trading within the market.
Some analysts have taken a closer look at the consequences of this bubble and its burst. In fact, the GameStop equity short is currently the 12th largest in the history of the US stock market. Keep reading as we explore this issue further.
An overview of the GameStop incident
The GameStop incident occurred in late January due to an organized effort by investors, many of whom were connected through social media. Short sellers had predicted a drop in GameStop’s stock price.
Short sellers borrow stock and sell it to other parties at a set price. Before the stocks must be returned, short sellers buy back stocks from those third parties at the new price, which they expect to be lower. They don’t actually have to invest money directly in shares to turn a profit.
However, this backfired spectacularly. Investors, many of whom are under the age of 40, saw this as a direct move to force the GameStop stock lower artificially. These investors then purchased a significant amount of stock over an 18-month period to drive up the price.
How the company’s share price reacted to this
Brokers for short sellers were then forced to buy back those shares at their highly inflated costs, which caused short sellers a loss of billions of dollars.
The cost of shares in GameStop has changed dramatically over the last year. In December of 2020, CFD trading shares were selling for around $10 each. This occurred despite Q3 profits 7x greater than that of the year before, when December shares sold for around $6. On January 22nd, the price of shares rose to $65 each, and on January 29th, the cost skyrocketed to $325 per share.
The bubble has begun to burst, with share prices in February ranging from $50 to $90 each. Wall Street analysts expect that the price of shares will continue to trend downwards, though it’s difficult to say when or where it is going to settle.
The effect on investors throughout the market
The short-selling failure has divided investors, politicians, and brokers into two distinctly separate groups. On one side, there’s a feeling of empowerment and fairness in the GameStop incident. This group feels as though everyone should have access to the stock market, and that some short selling practices exist to harm companies in direct competition with other parts of the trader’s portfolio.
On the other side, there’s a feeling of being taken by novices and amateurs. Some experts worry that the swell of new investors might increase volatility across the stock market and believe that these shareholders do not understand their impact.
Regardless, brokerage apps like Robinhood have cut off access to select stocks for users. Those who made money in the GameStop trade are currently unable to withdraw their earnings and must await further regulation decisions.