What Investors Learned From the GameStop Incident

GameStop Incident

GameStop is a video game retailer that was popular in the 90s and early 2000s. The company has struggled in recent years. This resulted in a drop in its stock prices. In early 2021, average Joe investors caused the price of GameStop stock to surge. The reasons they did this and the results they got taught investors many lessons about how investing has changed.

Social Media and Investing

Reddit is a popular social media platform. The subreddit r/WallStreetBets boasts over 2.9 million members. They discuss their investing successes and failures.

In early 2021, the subreddit r/WallStreetBets buzzed about the value of GameStop. Members of this subreddit realized that hedge funds had taken short positions in companies like GameStop. They were borrowing shares of the stock at a particular price. The expectation was that the value of the stock would be lower when they had to pay back the borrowed shares.

The Reddit community realized that the price of stocks for companies like Blockbuster, AMC, and GameStop was being pushed lower and lower. Collectively, they bought as much of the GameStop stock as they could.

This did two things. First, it caused the price of the stock to soar. Second, it caused hedge funds that had shorted GameStop to lose a ton of money.

As more people purchased GameStop stock, there was less of it available. Its value increased. This means that the average Joe investor who purchased GameStop for $10 or $12 in January 2021 could now sell that stock for $200 or $300 in early February. Hedge funds that had shorted GameStop stock at $10 or $12 in January had to repay it at $200 or $300, causing them to lose a lot of money. This is an oversimplified explanation of what happened.

Lessons Learned by Investors

Shorting positions, or doing a short squeeze, is not new. However, it is typically done by large investors. This was the first time average investors collectively engaged in this process. And this was the first time a short squeeze played out in such a public forum.

The public nature of this drama meant that many people wanted to learn how to invest for the first time in their life. It helped that the stock, GameStop, was a company they understood.

Videos explaining stock investing, trading, and going short, medium, and long became unbelievably popular on YouTube. People became active traders, hoping to cash out on that big win.

This situation has taught investors that trading has become like a video game. The difference is that actual money is on the line.

Hedge funds learned what it is like to be on the other side of the games they play. Many financial leaders criticized the Reddit users who took part in the short squeeze. The irony is that these same hedge funds have engaged in the same practices for decades. And they have gotten very rich from it.

Retail investors learned that real money can be made in the stock market if they have the right knowledge, available capital, and the will to ride things out. Traders who purchased GameStop early on made unbelievable money.

Retail investors also learned that the market can change quickly and that putting all of their money into a single stock is incredibly risky. People who were late to the game may have invested a ton of money only to watch their investment disappear.

Experience Is Still King in Investing

It is fair to say that the GameStop phenomenon was a one-time occurrence. Major financial investors are savvy people, and they will quickly adjust to prevent anomalies like this from reoccurring.

Retail investors that have no experience dealing with the market will lose money quickly. Many fledgling investors got started using free trading apps. They lack knowledge of the intricacies of why the market moves as it does. This leads them to make decisions based on emotion. These risky bets usually turn out bad.

The GameStop situation was intriguing. It was fun to watch. But for most people, it was better to be an observer than a participant. This doesn’t mean that people should not invest. It means that they should not risk their life savings or money that they cannot afford to lose. Before investing, make sure you have the basics. This includes an emergency fund and retirement investments.

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