GameStop (NYSE:GME) stock insanity: Here are 4 things you need to know

Here are 4 things investors need to know about the insanity of the GameStop Corp (NYSE:GME) stock price over the past few days

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The world of investing has been lit in conflagration over the last few days by a previously little-known company called GameStop Corp (NYSE: GME). If you want to know why, just look at a 6-month chart of the GameStop stock price.

Six months ago, GameStop stock was worth around US$4.

A month ago, it was a US$19 stock.

Last Friday, GameStop shares were trading at a healthy US$42.50.

And last night, GameStop stock hit an all-time high of US$483 a share. That’s a return of more than 1,000% in just a week, almost 2,400% in a month, and… wait for it… 11,800% over six months.

So now you know.

According to reporting in the Australian Financial Review (AFR) today, here are four things you need to know about what has happened with this company.

1. GameStop rally was sparked by a short squeeze

A short squeeze occurs when short sellers have to close their short positions because of a rising share price. Normally, this all happens at once in a chain reaction and leads to a massive imbalance between buyers and sellers. And when an imbalance like that occurs, it can result in a rapid and enormous share price surge. We saw similar events occur with Tesla Inc (NASDAQ: TSLA) stock last year. But what’s happened with GameStop is a record-breaking one for the books.

2. ‘Amateur’ investors caused this one

This move is being put at the feet of the new generation of investors known as ‘Robinhood traders’, named after the popular United States free brokering service Robinhood. The growing clout of these traders, who are famously driven by a ravenous desire for quick, ‘casino-like’ wins over a long-term investing mindset, is proving to be a force to behold. This type of buying and selling often involves the trading of options, rather than shares themselves. Options can be used as a high-risk, high-reward bet on the potential movements of a share price.

3. Collective action proves powerful for GameStop

As we previously flagged, this wasn’t a move orchestrated on Wall Street. GameStop was targeted by a group of ‘Robinhood traders’ from the Reddit group WallStreetBets. These investors have figured out that if they move as a group, they have the power to manipulate the price of a company. GameStop was targeted because these investors noticed that a large number of this company’s shares were held in short positions.

Someone surmised (accurately as it turns out) that if there was enough buying pressure, it would cause a short-squeeze. And that’s exactly what happened. Then, add an army of other traders trying to jump on the bandwagon, and you can start to see how this incredible share price surge unfolded.

4. When does this end?

Like all ‘bubble’ events in history, this one is set to reward a few lucky investors handsomely at the expense of the many. The AFR report notes that Robinhood and other traders have now placed trading restrictions on GameStop and other stocks that have been targeted in a similar manner. The report also posits that these actions hurt the entire share market by introducing massive pricing distortions that affect the broad flow of capital.

GameStop stock closed at US$193.60 this morning (our time), already down ~60% from the highs we saw earlier in the trading day. But then again, it was up another 61% to US$312 in after-hours trading. Who knows when the madness will end!

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Sebastian Bowen owns shares of Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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