It sounds like a tag line for an advert on a stock market trading course, but no. For anyone following the financial markets during the last few days, these stocks have seen a rollercoaster ride of craziness in their share prices.
Literally 1000s of multimillionaires have been created in a day and mostly people who have little experience with stock markets. Can you join the Gold Rush? We would not recommend it, but there may be some options.
The action followed anger against multi-billion dollar Wall Street short sellers. We recently wrote an article about how it is possible to make a huge return by shorting Tesla shares and this is the same. The short seller is someone who agrees to sell a share he does not own in the future. It sounds illogical, but it is quite normal. Basically you pay a small fee to borrow a stock and you have the right to sell that share. But you must still return another share later to the owner. If the price goes down, then you buy a new share at a lower price and give that “cheaper” share back to the owner. So you sold his share at a higher price, bought a new share at a lower price and give that one back to him. You keep the difference.
A group of small private share buyers on Reddit, the social media platform, agreed to buy GameStop shares in order stop the short sellers (big Wall Street companies) pushing the price down by short selling. The idea spread and many people started buying. Since the price is determined by supply and demand, as more people bought, the price went up. A few days before, the price was around $3. In one day, it rose to over $300. If you invested $10,000, that would be worth $1m the next day if you sold.
The next day, some trading programs blocked the share buying actions on their platforms and the price dropped to around $200, Elon Musk, of Tesla fame, tweeted his 24 million users a message which was understood to mean they should buy the shares and the next day the price was over $400. You could again double your money.
The short sellers lost billions of dollars and now there is an uproar with the SEC (American financial service authority) jumping in to the situation.
It is clear to every professional share trader that the price of $400, $300 or probably even $20 is too high value for GameStop which is a failing company selling computer games from shops. Over 200 of their shops are closing due to the pandemic. So, although it is clearly a risk, anyone who makes a short sale at a price of £300 will probably see the price fall back. Maybe to under $10 like it was a few days before. When that is leveraged 10x (see our earlier Tesla article), anyone investing $1000 in the short sell would turn that sum into $2.7m.
Not bad for a day’s work…