2021 has proven to be the year where average Joes can become overnight millionaires by playing the stock market. It was all thanks to the GameStop saga – the time when a group of users from the social media platform Reddit managed to outwit even the world’s most astute financial investors. No one ever imagined that GameStop’s stock (GME), the stock of a legendary gaming store that was facing some serious financial issues including the closing of more than 1,000 stores, would become the jewel stock of 2021.
But how did Reddit’s users manage to blow up the GameStop stock in the first place? And what are the key lessons to take away from the Gamestop Stock frenzy of 2021? Let’s take a look at how the GME stock boom came to be; and what you can learn from it to make your own sound financial investments.
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What Started Stock Frenzy
Hedge funds and short-sellers aren’t the most popular people in the investing world. They make their fortunes by placing bets on when a company’s stock will crash. In simple terms it works like this:
- A short-seller makes a bet on when stock will crash.
- They “borrow” some of those stocks to sell on the market by promising to buy them back at a later date.
- If they win the bet and the stock crashes; they end up making some serious cash; by having bought a stock for a low price and selling it for a higher one.
- If they lose the bet and the stock price doesn’t fall, they simply mitigate their losses by buying more of the stock they just bet against.
GameStop is a video game and electronics retailer that was having some significant financial problems for many years. Short-sellers believed that Gamestop’s bad luck was bound to continue and this was their chance to begin short-selling GameStop shares.
That’s where Reddit users from the sub WallStreetBets stepped in. These users started to invest en masse into GameStop; and managed to drive the GME stock prices as high as $347 per share. As a result, some short-sellers lost billions during the GameStop stock frenzy.
What Did We Learn?
There are several important takeaways from the GME stock story:
- Increased interest in stocks and shares
Investing in the stock market is no longer just for professionals and their wealthy clients. The GME stock boom showed us that online micro-communities can have a significant impact on market trends and that new investors can get started investing with very little money thanks to commission-free trading platforms like Robinhood.
- Avoid following the crowd
While taking part in the GameStop saga was certainly exhilarating for its members, financial investments are something that should be undertaken with a lot of care and careful consideration. While it’s easy to win money playing the stock market, it’s just as easy to lose it all and that can be very painful when you’re talking about your life’s savings.
- The stock market can be manipulated, so proceed with caution
Lastly, make sure you do your research well before making any type of financial investment. If the GameStop saga taught us anything it’s how easy the market can be manipulated. Always invest only what you can afford to lose.