Pattie Lovett-Reid: What's going on with the surging shares of GameStop
HUNTSVILLE, ONT. -- GameStop closed Tuesday up over 92%, so what is going on?
This is the story of the little guy taking on the big guy, and for now the little guys are winning.
It is hard not to take notice of a company whose stock has had a 52-week low of $2.57 and at 52-week high of $159.18. I'm talking about GameStop, whose current fundamentals do not match the euphoric high of the stock.
What is going on? It is called short selling and is a legitimate and important part of market activity.
This is where you borrow a stock from a broker for a period of time and then sell it back into the market hoping the price has decreased so you can buy the stock back at lower price.
Here is how you make money. You look for one of the least-loved companies going and you are betting the stock is going to fall. You borrow the stock at say $25 and hope to sell it back into the market at $20 and then buy it back at the lower price and you pocket the difference. But what happens if the stock starts to climb and it goes to $30 or even $40. You lose money and the amount you lose could be catastrophic as the stock climbs higher and higher. Sometimes traders will hold on to a stock longer and longer hoping it will fall and it doesn't. This is referred to a short squeeze.
GameStop isn't the only company coming gaining traction without fundamental strength. In the past few weeks BlackBerry, Bed Bath & Beyond and even entertainment giant AMC have caught the attention of speculative traders.
The pros will tell you they bet against a company based on the fundamentals and they believe the stock will trade lower. Enter the retail trader or the little guy. In the past year this has become a force to be reckoned with, having over 10 million accounts opened in the last year alone on platforms like Reddit and WallStreetBets. They pick a stock - in this case GameStop, share information of what to buy and when to buy and so on.
It has become a sport and the stakes are rising.
However, this is a dangerous game that isn't likely to end well and rampant speculation ultimately leads to a bubble being burst and along the way there will be serious casualties.