What the F*** happened to GameStop, why you should worry and where is the price heading?
Unless you’ve been living under a rock, you’d know that there’s been a massive frenzy over a stock that rallied over 1,900% in the last few weeks.
I’m talking about GameStop.
A gaming company which was $4 last year and today (as I’m writing this) is over $360 per share. That’s over 8,000% growth.
In fact, my inbox has been flooded over the last week with questions, about what happened with this phenomenon.
Funny thing is, I’m getting questions from not only investors and traders but also from Facebook friends, Virtual Reality pals and even acquaintances who’ve never even bought a share before.
And so, in this article, I’m going to explain what happened to the company, why you should worry and where it’s heading…
GameStop WAS one of the victims of COVID-19
GameStop is your everyday brick-and-mortar company. It sells video games, consoles and accessories.
It was one of the victims that was hit hard by the COVID-19 crisis.
In fact, last year, the share price was trading under $4. And since then, the fundamentals were looking bad.
Not only was it facing internal issues, it was also competing with major gaming companies that started to offer their games online.
So it was basically like Kodak was when digital cameras came out. Or Blockbusters was when people turned to online i.e. Netflix.
GameStop just didn’t have the speed to evolve, move online, they were suffering from heavy losses and were closing stores.
And massive hedge fund companies like Melvin Capital and Citron, thought it was a great opportunity to short the shares in the hopes that the price would drop and where they can profit.
And so just a month ago, the hedge funds shorted the share at around $15 in the hopes that the price will drop.
Even Citron Managing Partner Andrew called GameStop,
“an old school, failing mall-based video retailer.”
Boy, I’m sure they regret every decision to short this underdog.
Before I continue, you need to know what shorting or ‘short-selling’ means. If you do know then you can skip the shaded area…
What is “short-selling” and how do you profit?
Most investors follow the traditional ‘buy low, sell high’ share investing approach.
This is where you’ll buy a number of shares at a low price with the expectation that you’ll sell them at a higher price for profit.
‘Short-selling’ is the opposite practice.
Shorting is simply a bet that a company’s share will drop in price, and so they will sell shares they don’t own.
Well, short-selling is where you’ll borrow a number of shares from a broker and sell them into the stock market at a low price.
You’ll then bet and wait for the share price to fall even lower, where you’ll re-buy the shares back, return them to the broker, and pocket the profit.
In other words, it’s where you’ll ‘sell high, buy low’.
Here’s where the danger comes with ‘short-selling’
What if you sell high, borrow the shares from the broker, and the share price decides to rocket?
Now you’ll have to lock in a loss and buy them back at a higher price than what you sold the borrowed shares at.
There are two dangers with shorting:
There’s potential for unlimited losses
When you buy shares the lowest price it can go to is 0.
When you short-sell shares, the share price can go up 100s, 1000s of percentages and higher.
This means your loss potential is unlimited when it comes to shorting.
There are a limited number of shares!