Financial media is obsessed with the GameStop (GME) story and the skyrocketing share prices the stock has seen. At the time of the writing of this article, GameStop stock had a 52-week high share price of $483 and a low share price of $2.57 with a current price of $66.26.
The stock was subject to short selling by several Wall Street hedge funds. A short sale is the practice of borrowing stock that you do not own, and selling it at the current market price with a contractual promise to repurchase those shares at a later date and return them.
This strategy is implemented when there is a belief that a stock price will go down in the future, enabling the seller to make a profit on the sales price less the expected cost to repurchase the stock at the future date. This is a high-risk investment strategy since your losses could potentially be unlimited if the stock were to go up in price instead of down.
GameStop became an unusual short sell story because a large number of retail investors belonging to an online financial community banded together to purchase GameStop shares. This created a supply and demand issue — also known as a short squeeze — that increased the price of the stock and inflicted losses on the hedge funds holdings.
GameStop does not have the financial performance or future earnings projections to justify the high stock valuations that were achieved during this cycle; it was caused by the speculation of retail investors.
There are multiple stories in the media about investors making large gains on their position in GameStop. These are the stories of those that bought low and sold high, or are of book gains, where they still maintain their position in the stock, and are subject to future gains and losses based upon the market value of the stock going forward.
The untold stories are those of the individuals that invested in the stock based upon the media hype and bought at the high end, and suffered significant losses as the stock made its rapid decline.
There were also reports of nefarious behavior on the part of some of the online brokerage houses being used by the retail investors when they placed a halt on trades on GameStop stock. This claim is unlikely to have much validity because brokerage houses, as financial institutions, are subject to strict capital requirements established by the Securities and Exchange Commission (SEC). Trading was reestablished after the brokerage houses obtained additional capital or reduced their positions in some of their more volatile stocks.
While there are individuals that made large returns on their investment in GameStop, there were also those that incurred large losses. Speculative investing is a high-risk proposition, and anyone that takes part should do so with the understanding of the risks involved as well as the willingness and the capability of incurring significant losses.
The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. It is not a recommendation, offer or solicitation to buy or sell any securities or any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions are assumed to be true and accurate. Grand Canyon Wealth Management does not warrant the accuracy of any of these.
Michael J. Day, CPA, PFS™ is the founder of Grand Canyon Wealth Management, where he provides financial planning, wealth management, and investment services. For more information, or to schedule a complimentary consultation, visit grandcanyonwealthmanagement.com, call (480) 590-3590, or email Michael.j.day@lpl.com. You may also follow him on Twitter @GrandCanyonWM. Securities and advisory services provided through LPL Financial, a registered investment advisor member FINRA/SIPC. Grand Canyon Wealth Management is not an affiliate company of LPL.