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US video and electronics retailer GameStop (GME) is the pioneer of the meme stocks trend that emerged in 2020 during the pandemic. Other meme stock examples include Bath and Beyond and AMC Entertainment. Basically, meme stocks are shares that gain a viral social media following, with investors snapping them up regardless of their fundamental quality. From April 2020 to January 2021, GME skyrocketed 10,692% in less than a year.
But how did it happen? It was all thanks to the community effort of the popular platform Reddit. Some users were promoting boosting GME’s price in a forum called WallStreetBets. But why? Basically, they were betting that short sellers, which were heavy on GME at the time, would have to cover their positions if the price went up. Short sellers make money by betting on stocks they think will fall. The responses were huge, and these investors successfully managed to “short-squeeze” the stock. In other words, they sent the price to the moon and forced short sellers who bet against GME to back out of their positions.
Many big investors were shorting GME at the time, including billionaire Carl Icahn. He started to short the stock when it was at its peak around January 2021, and he still holds a large short position in GME, although just how much isn’t clear. And it looks like he’s sticking to his guns and betting GME will still fall. Although the retailer rose almost 5% on Tuesday, it’s still far from its peak of US$483 per share. But Icahn reportedly will keep adding more short positions against GME because he thinks the meme stock is influenced more by online sentiment than its fundamentals.
“It’s really the same type of people – the same mentality. These guys are momentum traders, they’re not looking at the underlying fundamentals. They’re looking at riding the tide in and out, and it’s worked because the market is trending. The problem comes when the market doesn’t trend, and you get taken out to sea,” said Ihor Dusaniwsky, managing director at S3 Partners.
“A lot of people now feel like they’re empowered, and they don’t have to go through the traditional players” of Wall Street to invest, Spatt said. “And in fairness, they didn’t do that great going through the traditional players.” said Chester Spatt, a finance professor at Carnegie Mellon University’s Tepper School of Business, when GME’s stock started surging in 2021.
“If everybody was out doing their own thing, and we weren’t in our COVID bubbles, I don’t know that this would have become as much of a market event,” said Sarah Newcomb, director of behavioral science at investment research firm Morningstar.