GameStop, a struggling US video game retailer, has seen its stock surge about 1,000 per cent in two weeks after a group of amateur investors active on the online forum Reddit banded together to fight the Wall Street funds that had pushed its price lower. A surge of retail stock trading over the last year lit the fuse that sent shares of GameStop Corp rocketing higher without a clear business reason.
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GameStop has increased more than eighteen-fold to $348 from $19 since January 12 and spurred concerns over bubbles in stocks that hedge funds and other speculative players had bet would fall in value.
Much of the recent action among Reddit traders has centered around shares that have been heavily “shorted” by other market players – traditionally an area dominated by hedge funds.
GameStop surged 50 per cent in extended trade after Tesla founder Elon Musk tweeted “Gamestonk!!”, along with a link to Reddit’s Wall Street bets stock trading discussion group, where supporters affectionately refer to the Tesla CEO as “Papa Musk.” “Stonks” is a tongue-in-cheek term for stocks widely used on social media.
Online discussions about stocks on social media platforms such as Reddit, Twitter and Facebook are seen by many traders and analysts as fuelling massive share price moves that cannot be explained by fundamental news or traditional valuation metrics.
Retail investors have long discussed stocks on social media, but during the pandemic these forums appear to be gaining more influence.
Massive share price swings for no apparent reason have caught Wall Street off guard. Short sellers, or investors who bet the price of a stock would fall, are getting crushed.
Melvin Capital, a well-established hedge fund, took massive losses on its bets that GameStop share would fall.
Traders scrambling to cover these short positions and prevent further losses had to pay inflated prices, which added more fuel to the rally.
Several traders told Reuters that this phenomenon – the classic short-squeeze – drew in still more retail investors hoping to ride the wave.
With unprecedented stimulus and easy money policies from central banks, investors then shifted to smaller stocks, especially ones that got beaten down during the pandemic.