The year 2020 is over and gone, but the craziness in the world and the stock market continues on. The markets are hitting all time highs; yet a few major hedge funds recently lost BILLIONS almost overnight. How did they do that? What does that mean for the markets and retail investors? If hedge funds and ridiculously smart, financial analysts can lose big, how can the average consumer expect to profit with the volatility?
GameStop stock and a few others were the major headlines of the stock market in the last few weeks. What exactly happened? GameStop announced in December 2020 that it would be closing over 1,000 stores. It is a retail store that sells video games. The streaming and online buying world combined with the pandemic left the store no option but to close and try to salvage some of their resources.
With this information, it was clear the company was struggling financially; therefore, billion dollar hedge funds started short selling stock against the company. Short selling is when an investor sells borrowed shares of stock with the hope of buying the shares back later at a lower price. It is essentially the opposite of traditional investing aimed at profiting from a stock's rise. With short selling, investors make money if the price of a company's stock falls. If the price rises, investors need to cover their positions by buying the stock back at a higher price. The losses can be substantial. Individual investors, buoyed by comments in the r/WallStreetBets Reddit community, began driving up the price of GameStop on January 11 when changes to the company's board of directors suggested it might be embracing a digital strategy.
The rising share price put pressure on short sellers and their bets for declines in GameStop shares. Soon, they were forced to become buyers of shares they had sold short, pushing share prices even higher. At this point, you had a massive influx of money getting poured into the stock by hedge funds AND retail investors and the rest is history.
The craziness continued for a few days, even causing the trading custodians like Robinhood, TD Ameritrade, and Charles Schwab to PAUSE trading against these stocks. This infuriated retail investors and lawsuits have already been filed. Due to the increase in the trading though, these companies needed to make sure they had the funds and liquidity available for the options that were being purchased and sold.
In a span of a few weeks, GameStop stock soared from $6.23 a share back in September 2020 to $483 per share on January 28th, 2021. If you would have put $10,000 into the stock at the low and sold at the high, you would have walked away with $775,000! That is absolutely incredible. Here’s the fact though: the company is struggling financially. There is no logical reason behind why the stock did what it did except fear and greed. Fear and greed have controlled the market for the history of the markets. For every person that made money, there are thousands that have gotten crushed and lost fortunes. The combination of stimulus money, people working from home, commission free stock trading, and low interest rates have truly made the stock market more like Las Vegas than ever before.
Can you make money in the stock market? Absolutely. Can you lose money in the stock market? Even the most savvy, wealthy, hedge funds can lose BILLIONS within days. What does that mean for you and for our clients? It reinforces to us why we do what we do which is specialize in safety. We focus on preservation and distribution. We believe once you reach a certain point, it’s not about making a ton of money; more importantly, it’s about not losing a ton of money. We want to thank you for your confidence, trust and friendship. We are here to serve you and give you peace of mind with your money. The peace that comes from knowing you’re not losing money in the stock market that few people achieve, but – PEACE OF MIND – that is exactly what we try to help our clients accomplish.