Gamestop craze and meme shares

In January 2021, the financial world was confronted with a phenomenon that shattered traditional expectations of rational market behaviour by demonstrating the power of social media and the collective retail investor. Millions of retail investors, many of them first-time traders, co-ordinated on social media to buy up the fading American video game store chain. GameStop (GME) shares. The share price exploded from tens of dollars to hundreds of dollars in a matter of weeks, causing huge losses for some of Wall Street's largest hedge funds. This event was much more than just a stock rally; it was a symbolic riot that changed the perception of the retail investor's impact and provided a cautionary lesson in the value of financial literacy.

In this article, we take a look at this unprecedented financial phenomenon, explaining its background - in particular the technical phenomenon called short squeeze (short squeeze) - and analyse what a retail investor should learn from this dramatic event.

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GameStop and short selling

In order to understand the GME stock explosion, we first need to look at what was GameStop. The company was once a giant in its field, specialising in the physical retail of video games and consoles. In 2020, however, GameStop looked like a sinking and doomed ship. The proliferation of digital downloads and the dominance of e-commerce quickly made their business plan obsolete.

Contribution of large funds to the fall

Wall Street's large institutional investors, especially hedge funds (English. hedge funds), saw GameStop as the ideal short sale (short selling) target. They bet openly and aggressively on a fall in the share price, assuming that the company was doomed.

Short selling - a risky bet on the downside

What exactly is short selling? This is a trading strategy where an investor borrows a share through a broker, sells it immediately off the market at the current price (say $100 ). The short seller hopes the share price will fall (say to $50), then buys it back (covering the position or hedging). covering) and returns the borrowed share to the holder. The difference - $50 minus fees - is his profit.

Short selling is extremely risky. If the share price rises instead of falls, the short seller's potential loss is theoretically unlimited, because the share price can rise indefinitely.

Critical discovery

Reddit subforum r/WallStreetBets Thousands of enthusiastic retail investors noticed that GameStop shares had been sold short in huge quantities. It was reported that the number of shares sold short significantly exceeded (by some accounts even more than 140%) the total number of shares of the company outstanding (float). This anomalous size, due to the complex chains of lending and selling, created the ideal conditions for an explosive event.

Short Squeeze (Short Squeeze)

When the proportion of shares sold short is abnormally high, the market is sensitive to a phenomenon called. for short term (short squeeze). It was this mechanism that was at the heart of the GameStop saga.

How does short-haul work?

A short squeeze starts when the share price suddenly starts to rise. In the case of GameStop, retail investors set this surge in motion by coordinating a mass buy of the stock on social media (often using the options-transactions, which provide more leverage to create buying pressure).

When the share price crossed a certain threshold, short-selling hedge funds and high speculators came under pressure:

  1. Guarantee requirements (Margin calls): Brokers demanded higher collateral from short sellers (margin) to cover their growing potential losses.
  2. Covering positions: In order to avoid unlimited losses or to meet margin calls, short sellers were forced to close their positions.
  3. Share buyback: Closing a position means buying back shares from the market.

This massive, forced buyback created massive buying pressure on the market, which in turn pushed prices even higher. This triggered a cascade where more and more short sellers were forced to cover their positions, pushing the share price to unreasonable highs. GameStop's stock, which started January at around $17, soon moved above the $480 level.

Real losses on Wall Street

In this chaos, hedge funds, such as. Melvin Capital, losses running into billions. Melvin Capital needed a quick cash injection from other funds to survive at all. This event clearly highlighted the impact of the collective action of retail investors, who often sought revenge or hobbies rather than traditional value creation.

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    Meme stocks: defining the new market

    GameStop saga launches new category - meme shares (meme stocks).

    Meme share is a company that has seen its share price explode in a short period of time, primarily due to a viral trend or narrative on social media, rather than an improvement in the company's fundamentals.

    The phenomenon of meme shares is characterised by:

    • Social sentiment: Buying decisions are driven by jokes, memes, collective unity and often a sense of "fighting Wall Street" (or just "fighting Wall Street"). FOMO - Fear of Missing Out or fear of missing out).
    • Volatility: Price fluctuations are extreme and unpredictable. Prices move up "towards the moon" (to the moon) and can fall just as quickly.
    • Speculativeness: It is not investing in the classical sense, but short-term, high-risk speculation.

    European investor and global FOMO

    While GameStop and most meme stocks are from the US (e.g. AMC, Blackberry, Bed Bath & Beyond), these phenomena are global. Retail investors in Estonia and other European countries are equally involved and exposed to the same risks thanks to modern, low-fee brokers (both European and US platforms).

    It is important to understand that the market has no borders. When the rumour is spreading on Reddit that the stock is a "hard sell" (diamond hands), this narrative is quickly spreading to retail investors in Tallinn, Helsinki or Berlin.

    Restrictions on rules and platforms

    At the height of GameStop, several US brokers, led by the Robinhood, GME and other meme shares, allowing only selling. This created a deep crisis of confidence. Many retail investors felt that the market was being manipulated in favour of the "big boys", even though the platforms themselves justified the restrictions on the basis of technical and collateral requirements (the margins required by clearing houses had jumped beyond their tolerance). This case was a particularly important lesson for Europe: even if you are a regulated platform, you need to be aware of liquidity risks and possible unforeseen trading restrictions when dealing with volatile assets.

    Lessons and warnings for the retail investor

    The GameStop saga was not a revolution, but a quick and painful lesson in market mechanisms. Here are three key pieces of knowledge every investor should carry with them:

    Understand the dangers of short selling and the mechanics of a short squeeze

    The GameStop case highlighted that. short selling Understanding the mechanics is critical. It allows us to understand that sometimes a rise in the share price is not due to the value of the company, but to technical and forcing factors in the market.

    The European example: the impact on Volkswagen (2008). GameStop wasn't the first to short-circuit. Probably the best-known European example dates back to 2008, when the Volkswageni (VW) The share's short-fall made it the world's most valuable company in the short term. Porsche had secretly increased its stake in VW, forcing short sellers to cover their positions. This showed that short squeeze is an old financial weapon that works for both old European industries .

    Emotions are the enemy of your investments

    Investing in GME was often a passionate but emotional decision. However, emotion-driven buying is the biggest stumbling block in long-term investing.

    A cautionary example: Many retail investors who bought shares near the top (at -$480) to the "hold the line" (hold the line) and show "diamond hand" (diamond hands), suffered heavy, often catastrophic losses. When the stock plummeted back to double digits, it was a painful wake-up call. True investing requires rational analysis, risk management and emotion-free judgment. What to do when the share price falls? Buy in ("buy on the downside" or BTFD - Buy The F**ing Dip) or sell at a loss? The answer must come from analysis, not social media shouting.

    Fundamental analysis and value

    The GameStop saga has cast a shadow over the company's real situation. Even at its peak, when the stock was in the hundreds of dollars, GameStop continued to be a loss-making and struggling retailer whose long-term value did not match its share price.

    Investor's note:

    • Is the company making a profit? In the case of GameStop, the answer was "no" (or "barely").
    • Are the company's plans for the future credible? In the case of GME, this was also suspect.
    • Am I investing in the value of the company or the social media narrative?

    Memes Shares stress that a value-based approach (often followed in Europe and Estonia by investing in stable companies or index funds) is a much more stable and reliable strategy for building long-term wealth than risky speculation. Don't let entertainment and the promise of quick riches overshadow rational judgement.

      Summary

      The GameStop saga was undoubtedly a milestone in financial history. It proved that a collective army of retail investors is capable of creating such volatility in the market for a short period of time that it can shake up even the world's largest hedge funds. It was truly entertaining and a sign of an era in which social media and accessible trading are creating new, unpredictable market dynamics.

      But entertainment and emotions are not an investment strategy. The GameStop explosion was mainly a technical anomaly and a short-term speculative bubble. While it delivered the guns of financial literacy and showed that Wall Street is vulnerable too, it left many speculators with long losses in the long run.

      Every retail investor, whether a beginner or an experienced trader, must learn from the GameStop saga: recognise the. risk, don't let yourself be led emotions and always do do your own homework (Do Your Own Research - DYORFinancial markets are changing, but the basic rules of investing - diversification, a long-term perspective and rationality - remain valid.

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