Everyone is watching in shock what is happening on Wall Street right now after reddishers have completely squeezed shortcuts with GameStop shares.
As is well known, after the US console game company GameStop became loss-making, large investors opened short positions in their shares to the news of their market prospects. But the fall was delayed after members of a Reddit forum began to push the exchange rate up in concert. To keep small investors moving, the price of GameStop shares rose 300% in 4 weeks, but the case is far from over. It is not easy to analyze the situation, as events change from minute to minute, and it is not at all clear who will fall and how much.
With the help of Bank360.hu’s financial analysts, we review the most important information about the increasingly complicated and extensive money market chaos.
Currently, GameStop is the most short-listed company on the US stock market with a 122 percent short interest rate. Short interest is a sentiment indicator that indicates that investors are extremely pessimistic about the company. But it is precisely this pessimism that may seem excessive to some investors, with the result that the market will price the stock aside and there is a chance of a bigger bounce, so they will buy.
So-called short squeezing took place at GME, AMC, BB , NOK, NAKD and other significantly shorted papers. Put simply, this means:
Several institutional investors are pessimistic about the above securities. They “bet” that the securities of these companies will be worth less (e.g. AMC cinemas don’t survive the coronavirus epidemic, they don’t buy in GameStop’s physical stores because everyone buys games digitally), so they take short positions in the stock market (they borrow shares , which they will sell while speculating that the share price will continue to fall, so that by the time the loan expires, they will be able to buy the share to be returned even cheaper, and the difference between the two transactions is the profit)
meanwhile, events may occur with the company that do not steer the exchange rate down, but upward. This is typically some kind of news or announcement (for example, in the case of AMC, that bankruptcy is being avoided and Gamestop has been recommended for purchase by a reputable investor). Thus, those who form a long position also appear, so they believe in an increase in the exchange rate. In this case, the small investors organized on Reddit took over the shares and “hypeed” the long position.
As the exchange rate rises, the squeeze will take place. Shortos, who make money when the price falls, avoid the big loss by buying the stock back more expensive before its price rises significantly (since if the borrowed share was sold for $ 1, playing to further falls, but its price has risen to $ 1.5, with an extra expense of half a dollar they can buy again the stock they have to return at the end of the loan). At the same time, their purchases also raise the exchange rate, so an explosive exchange rate increase can develop very quickly. This was also the case for Gamestop or AMC.
An unprecedented event on the money market
Short squeeze is not uncommon on the stock market. It is enough to think of Tesla between 2019-2020: the fundamentals of the stock did not confirm the price, according to many investors, in Hungarian they did not understand the company as much as it was possible to trade its shares. Many took short positions, but Elon Musk’s charismatic personality and built-in fan base led to price increases and then, as a self-stimulating process, other small investors took to the growth, pushing prices further and ousting a significant portion of the short. (Tesla’s share price actually fell later, although the decline did not prove to be lasting, as the paper eventually started to rise sharply in the rest of 2020.)
The current thus an unprecedented event due to the fact that for the first time given several conditions at the same time that allow:
- Plenty of ordinary ordinary citizens have access to disposable capital through stimulus checks. This money is not used by many people for consumption, but they try to “turn it over”.
By now, these clients have access to very easy-to-use, fast and inexpensive trading platforms like Robinhood, eToro, Revolut, and of course they can also trade on traditional trading platforms. The entry threshold for those who want to trade has become low. In various Internet forums , especially on Reddit, they are able to organize very quickly due to the otherwise epidemic and many focus on one goal.
What influences the investment sentiment
In recent days, more the media, Reddit and other social sites also played a role in the purchase of shares by small investors who lacked all the fundamental funds to buy and traded solely in the hope of a high return
it is determined by supply and demand and available information, among other factors such as herd spirit and other behavioral psychological effects. As of Thursday, the situation is an unexpected factor, such as the fact that few people have calculated that the main trading platforms involved in the case have restricted trading in these securities, such as the inability to buy the shares concerned.
case, Bank360 does not recommend listing events on the entire stock exchange, as the current action only affects a few papers.