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A trading forum on Reddit leads a stock to surge over 1700% in just one month! Who is the villain in the GameStop saga?

Power of the internet has buoyed the GameStop frenzy on Wall Street. Investors globally and much of the internet are left enraptured to witness this blatant yet courageous act, unlike a good horror film for everyone is aware of the fact that doom is just around the corner and will result into inexplicable losses for some key players. However, few lucky ones might definitely emerge stronger by defeating the monster.

GameStop, a game company in the united states has been witnessing a massive rally in its share prices whose cause is ostensibly known to be the wallstreetbets public forum. WallStreetBets is a popular Reddit page notorious for targeting short-sellers. The forum fuelled massive gains not only in GameStop but in a number of other shares as well. However, the shares of the same drastically dropped down after the forum temporarily turned invitation-only. This trading frenzy that has been spreading to countries outside America as well have concerned the White House.

With the mass attention, this trading frenzy has received by traders around the globe, the shares of GameStop have reached sky-high levels. Grabbing the limelight in the whole rustle, shares of GameStop have soared more than 300 per cent in the past week. Needless to say, GameStop has been the main focus of attention of traders.

This extensive and sudden surge in the share prices of GameStop has also led to short-sellers experiencing record losses with the instances shorting in GameStop shares increasing by some 1.53 million just over the last 30 days. This has given the gaming company a short interest of nearly 71.79 million shares. Experts and market analysts claim that the super surge in share prices is the result of a fight between private investors and professional investors.

GameStop is expected to lose money this year and next behind which are its sluggish sales growth. They aren’t able to grow because gamers simply no longer go to the mall to buy games or consoles. However, some investors have argued that GameStop was undervalued, especially when sales of video games skyrocketed during the pandemic era.

Interestingly, the initial stock surge was due to a legitimate reason: The company adding three new directors to its board, including Ryan Cohen (Chewy co-founder) on January 11. Investors acted vivaciously with the entry of Cohen in the company who has the potential to bring digital experience to the table, something GameStop desperately needed.

 On January 11, the stock surged a little less than 13%. However, the surge wasn’t a momentary stock surge as it rose as much as 57% two days later followed by a 27% rise the next day. The following week saw it rise 10% twice and 51% another day. After which it rose another 18% then 93% and more than doubled.

The reason is far from the company’s actual announcement or operation but the Reddit group which bought a ton of GameStop options forcing the short-sellers to buy shares to cover their losing bids. On Wednesday, a time when all three major stock indexes slumped down, GameStop settled at an astonishing and mind-boggling 134%.

To make the picture clearer, one share of GameStop cost about $4 a year ago as against its present value of $200 per piece.

Now you make ask who is the monster and who is the hero?

Well, we still do not have a rigid answer to that. This time, nobody is the villain and everybody is the villain as it depends entirely on a person’s perspective.

On one side of the boxing ring, we have the amateur day traders who coordinate via a forum on Reddit had with the aim of supporting any struggling company by driving up its share price. Companies like GameStop (GME), BlackBerry (BB), Macy’s (M), and AMC (AMC) have been at their radar lately. AMC is a movie theatre chain which has seen one of its worst times during the pandemic. The #SaveAMC was also seen trending on Twitter after this WallStreetBros incident.

While on the other side you find hedge funds and short-sellers. Known as the wall street elite, these people have placed bets for the company’s stock to crash. They are a reliable and trustworthy source of information and financial knowledge for some people while they’re detested by many Millennials and Gen Z people. They hold these elites responsible for creating a house-of-cards financial system that ultimately led the country to the financial crisis of 2008.

So, Where do we stand now?

The rise of no-fee apps like Robinhood has changed the way people trade and while technology has democratized investing, the traders have become smarter than ever.

People prefer to pay an analyst to guide them through their portfolio building process or they tend to create/join various trading suggestive groups or accounts. They create an anonymous Reddit account and follow trading forums like WallStreetBets. The latter is a more preferred choice of the young Gen Zers. The huge popularity of such forums as well as the potency to manipulate masses partly becomes the reason behind such sudden surges in shares such as that of GameStop and AMC.

However, It wouldn’t be wrong to say that we still await the conclusion. The climax of this movie is where we are right now. Shares of GameStop stand at level greater than 1,700% since the start of January with platforms like TD Ameritrade and Robinhood restricting trades on AMC and GameStop and the White House and SEC trying their level best to monitor the situation.

Who fuelled the trade fire?

WallStreetBets, the popular Reddit Groups, has more than 2 million followers who have spammed the forum with posts positively reacting to the stock gains without any righteous indignation.

As the rally gained momentum, Tesla leader Elon Musk seemed to join in. On Tuesday, Elon Musk, notoriously known for his twitter presence, buoyed the rally with a single-word tweet — “Gamestonk!!”. Tech investor Chamath Palihapitiya also involved himself in this frenzy by buying call options on Tuesday. However, he closed his position on Wednesday. He defended the retail-investing phenomenon playing out on Reddit by claiming that he would donate all his profits to charity.

“Instead of having ‘idea dinners’ or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum,” he said. “What it proves is this retail [investor] phenomenon is here to stay.”

But, Isn’t this a bubble?

Well, quite evidently, it is most definitely a bubble.

Few supporters argue that GameStop was highly undervalued. But hey, wait. There hardly exists any fundamentals to support these surging stock prices. Thus, clearly, no one believes that GameStop, AMC, BlackBerry, Macy’s, or other companies that are being promoted by the WSB is genuine and thus, at some point, reality will take over the impulse.

The GameStop horror film is at its climax holding a battle of amateurs vs. professionals with the new generations winning at the moment. But, like all bubbles, this one’s going to burst at some point. By that time, the analysts and the non-traders can sit at the pavilion and enjoy the adventure as the short- sellers try their level best to minimize their losses or to overturn the situation in their favour and the WallStreetBoys spend their time counting on their gains.

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