Unpopular stocks like GameStop, Nokia, and AMC Entertainment Holdings Inc. have surged in the last few days not due to the companies reporting excellent numbers but due to a Reddit forum and a bunch of users revolting against trade pundits.
What Really Happened?
GameStop became one of the most popular bet-against stocks due to its business model. Most investors predicted the stock to fall and the pandemic made the company suffer; however, things took a u-turn recently when some Reddit users decided to fight Wall Street and help the stock reach newer heights.
The r/Wallstreetbets subreddit is credited for the price action. The community joined hands to inflate the stocks for less popular or widely-shorted stocks like AMC and GME. There’s only one thing common between these stocks – investors expected the companies to go bankrupt and opened several short positions to ride the wave.
Reddit users believed these businesses have more potential and started to invest heavily in these shorted stocks in order to make a point and prove Wall Street investors wrong.
They encouraged each other to buy these stocks and hold long positions. The Reddit target for GME IS $1,000. The group that consists of more than 2 million users doesn’t intend to sell GME until they reach their target.
The Price Action
This caused GameStop, which was trading around $20 in the first week of January, to nearly double by the third week of January eventually reaching new highs and hitting the $347.51 mark on 27 January – an increase of more than $1,000 percent.
The stock, however, couldn’t sustain these levels and fell to $193.60 on 28 January before increasing to $325 on 29 January.
AMC saw similar numbers – jumping from $5 a week ago to $20 on 27 January – before falling to $14.7 on 29 January.
While these two companies have benefited the most from the Reddit saga, some other stocks have also gone up.
Nokia rose more than 50 percent – from $4 to $6.5.
BlackBerry increased more than 200 percent – from $7.65 to $25.10 before falling to $14.65 on 29 January.
This is considered manipulation as these valuations aren’t justified and they’re due to a few investors trying to control the market.
About The Outcome
These massive changes have made investors suffer as they did not only lose money on shorted stocks but also long stocks that fell as money shifted from popular names like Tesla and Facebook to less popular stocks like GameStop and AMC Entertainment.
Melvin Capital lost around 53 percent in January due to its bets against these companies.
According to reports, GameStop short sellers have lost more than $5 billion due to this manipulation.
Many trading apps including Robinhood have blocked users from purchasing fast-moving stocks like GameStop and AMC due to extraordinary market conditions.