For millions of people in dozens of countries, the GameStop short squeeze of early 2021 was the first time they consciously started thinking about stock investments. People call it many things now, from the “power of the swarm” example to a herald of the new blood coming to the stock market, forcing the dinosaurs away. It might be all of those things, but what we want to figure out here is: did we learn anything from the GameStop adventure?
When they say that the rich get richer and the poor get poorer – they’re 100% correct. And in the stock market, this statement is even more true. The price of shares is affected by the laws of the market: supply and demand.
And the possible impact of the rich on these laws is unreachable for any one of us, mere mortals. For example, if an average Joe decides to empty his savings account, which has, let’s say, $14 000 in it – he’ll be able to buy 20 shares of Tesla company, which cost about $690 per share at the time of writing. The influence of this buy on the price of Tesla stocks is negligible, as well as the impact of Joe selling his shares later.
Yet if an average hedge fund or multi-billionaire decides to buy or sell something – the sums might range from millions to tens of billions of dollars. With GameStop, their game was to borrow as many shares as possible and sell them all, driving the price down. This process is called shorting. When other investors see that the price falls – they’ll sell their shares too to avoid huge losses, and the price plummets even further. Then, when the time comes to give the borrowed shares back, the price will be significantly lower than when they were sold, giving shorters huge profits.
When to Hold And When to Sell Stocks?
Stock trading is mainly about the point of entrance and the point of exit. If you enter the trade when the price is low and exit when it’s high – you’re golden. To be ready when the next big thing happens – you need to learn more about when to purchase and when to sell stocks.
Most of the shorts are executed by small groups of wealthy people or firms, deciding to act together. They’re always in touch, and the capital they command is immense. With GameStop, regular day-traders have won over the big hedge funds because of their numbers and communication. Shorters didn’t realize that tens of thousands of people will buy stocks to stick it to Wall Street. Some of them did it out of greed or spite, some – just for lulz or to support their friends, but the results were fascinating. The hedge funds that initiated the short have lost billions and let the day-traders have a taste of their blood.
But what about the people? Did anyone win from this? The traders who were there from the start, who already traded a lot before the short squeeze was initiated, and who were smart enough to keep twitting “Hold, brothers!” while selling their shares at their peak price. The ones who entered the trade late, who didn’t have the experience to figure out how this would end, lost a lot.
In summary, we can say that it’s definitely not the last stock market flashmob, and you can profit from such things if you’re experienced enough and can react to the news quickly. And to be able to do that – start trading now, get the hang of it, figure out what’s what – and wait for the opportunity to make your first million!