NewsPhoenix Metro NewsCentral Phoenix News

Actions

Wealth management advisor explains GameStop stock frenzy

GameStop-Stock Surge
Posted at 4:36 PM, Feb 01, 2021
and last updated 2021-02-01 20:53:56-05

PHOENIX — The GameStop market frenzy continues to captivate investors and the Internet. The company's stock skyrocketed last week after an army of traders on Reddit bought up stock to drastically raise its price.

Dmitry Petrov in Phoenix occasionally invests in the stock market and said he was intrigued by the push to buy GameStop stock.

"I just kind of heard what they were up to and what really caught my interest was sort of how financially sound the trade was that they were doing," he said. "It was like really impressive research work for all these groups of retail investors to undertake this past year, and to see it play out, it's pretty interesting."

Amateur or "retail" investors teamed up through an online forum on Reddit called WallStreetBets.

The goal was to check hedge funds shorting the struggling company. Shorting is when an investor who thinks a stock is going to go down borrows shares today and promises to purchase it at a later date at whatever price it is trading at then.

It was also an opportunity to make money. The stocks - soared, at one point -- delivering a 1600% gain.

Michael Carlin, president of Henry+Horne Wealth Management in Scottsdale, said big hedge funds in the past have used their size and power to direct where stocks go.

"And this was the first time in memorable history --certainly in my 26-year career--that I've seen retail investors gain the reins and take control away from the institutional community," he said.

Carlin explained that hedge funds were pushing down GameStop by borrowing more stock than was issued, preventing the company from functioning.

Buying stock in droves forced hedge funds to buy back that stock at inflated prices. In just weeks, those hedge funds lost billions of dollars.

"The behavior of buying stocks, holding stocks the way the community around Reddit has done with GameStop is very much how the market works, they're just making it work in a very focused and concentrated way," said Carlin. "Reddit has proved that a community of people can make meaningful change by focusing on buying up certain companies."

On the institutional side, Carlin said there's an opportunity to evolve.

"One of the things that likely could and should change is the amount of short-selling that was allowed to happen with GameStop was excessive."

On Thursday, Robinhood --a free trading app --suspended trading GameStop and other red-hot stock shares, citing extreme volatility. But some claim the app caved to pressure from powerful institutions on Wall Street.

That --and shares sold--have led GameStop stock to fall.

The Securities and Exchange Commission, the agency that regulates Wall Street, said it will "closely review" actions by trading platforms to restrict transactions.

Carlin said eventually, more GameStop shares will be sold.

"Unless GameStop has a miraculous recovery, a lot of people are likely to lose a fortune," he said.

Individual traders have also been targeting other struggling stocks. They bid up the price of movie theater chain AMC in a single day Wednesday.