GameStop share price explained: 6 things you need to know as stocks rise again
GAMESTOP shares more than doubled yesterday afternoon, echoing the frenzy that saw the stock soar 700% last month after it was targeted by an army of amateur traders.
A trading frenzy surrounded the stock in late January, causing professional hedge funds to lose billions of dollars and helping some amateur traders make some serious cash out of the surge.
GameStop shares surged 700% at the end of January to $347 but have declined sharply since, hitting $44.97 earlier this week as the Reddit army phenomenon seemed to be winding down.
That was until yesterday afternoon when the stock more than doubled in value to $91.71.
The initial rise was attributed to the Reddit craze but analysts have struggled to find a clear reason for the latest boost.
The price spike coincided with the resignation of GameStop's chief financial officer Jim Bell, which could signal a new direction for the company.
GameStop said in a statement announcing his departure that it was looking for a replacement with "capabilities and qualifications to help accelerate GameStop’s transformation."
If you're wondering what is going on, we round-up what you need to know.
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It has also been hit hard by the pandemic and in general, it's not expected to return to its pre-Covid sales.
However, Peter Hanks, analyst at DailyFX.com, reckons the recent share price hike could save it.
He said: "The rapid rise in share price might allow GameStop to raise more capital by offering shares, granting GME the opportunity to stave off bankruptcy or even implement some of the changes to its business operations that early buyers of the stock were clinging to as bullish catalysts in the first place."
2. Stocks soared by 700% in January but now they're tumbling
Between Tuesday (January 26) and Thursday (January 28) when the trading frenzy began to start, shares in the company soared by a staggering 408%, from $96.80 (£70.83) to $492.02 (£358.44).
In fact, shares rose by an incredible 15,039% 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 at its peak price will have made a profit of $488.77 (£356.08) per share.
But shares are volatile and can quickly fall as fast as they can go up.
GameStop shares plunged below $100 per share and barrelled toward their steepest one-day decline on record on February 2.
3. Reddit investors are behind the surge
The retailer has been caught up in a David and Goliath stocks and shares saga between amateur investors and Wall Street hedge funds.
Similar to many failing companies, the business has become the subject of what's known as "short selling".
In simple terms, this is when professional investors borrow shares of stock to sell, and then buy them back at a lower price.
Essentially, they are betting that the stocks will drop in value so they can pocket the profit when they hand them back to the company they borrowed them from.
They rely on the company failing, making it a risky way of raising cash - any positive news could see shares rise and cause them to make a loss.
To prove a point, the Reddit community - the Davids - decided to take on the hedge fund - the Goliath - that was short selling by buying up GameStop stock as quickly as possible, driving up share prices.
"Young investors are among the most innovative, finding new ways to capitalise on the systems that confine them.
"But their dedication to sustainability and social justice is given equal weight to their exploitation of the neoliberal capitalist model.
"We haven’t seen the end of Reddit vs Wall St and we’ll be seeing this phenomenon develop and shape the market over the coming months."
4. Some trading platforms stopped taking new customers
The surge in amateur investors snapping up GameStop stock in recent days has left some trading brokers struggling to keep up.
In fact, a tweet from billionaire Tesla boss, Elon Musk inspired even more people to invest.
Posting a link to the GameStop Reddit thread, he wrote "Gamestonk!!".
Some trading brokers, including TD Ameritrade, were forced to stop taking on new customers while they dealt with the backlog.
At the time, 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."
5. Investing is risky and you could lose it all
Investing is essentially gambling and there are no guarantees that you will see what you pay in go up.
The fall in share price means that you'll likely make a loss.
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.
Russ Mould, AJ Bell Investment Director pointed out that GameStop shareholders need to find a buyer to lock in their profit.
He said: "Who is going to do that, in the knowledge that the share price has been wilfully ramped, there is hot money looking for an exit and the valuation looks lofty for a loss-making retailer?
"Booking a profit might not turn out to be as easy as it looks, at least anywhere near the share price peaks."
Mr Hanks reckons buying GameStop stock isn't wise as their value has already appeared to have peaked.
He explained: "The behavior of GME shares has passed the point of traditional “investment analysis” into full blown mania so investing in GameStop at this stage might be more akin to sports gambling, rather than making an educated wager on the company’s financials or revenue expectations."
6. It's not illegal but regulators could take action
Leading hedge funds in the US have been calling on regulators to take action against this kind of trading behaviour, arguing the public shouldn't be allowed to control the market like this.
But there's no evidence that what the amateur investors did was illegal.
Even so, regulators in the States are said to be monitoring the situation, according to CNBC News, and that the Biden administration's economic team was "monitoring the situation".
Mr Mould explained: "There is no law against what has happened, although the co-ordinated nature of the buying via social media could be seen in a worst case as intentional market manipulation and America’s Securities and Exchange Commission is investigating."
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