Bubbles are not unprecedented. But the way the Gamestop stock price bubble is playing out certainly is.
First off, let me be clear. The Gamestop stock price will come tumbling down. It may be next week or next month, but reality will set in. A company’s stock valuation is supposed to reflect what a company is worth. The day to day fluctuations are supposed to reflect what investors “think” a stock is worth. The Reddit Gamestop stock price mania does not even hold to this.
GME Stock Price
Retail is struggling. Malls are closing. Online commerce is increasing at an unbelievable level, and and the pandemic has only reinforced this. Clearly, there is a reason the large WallStreet hedge funds decided to short stocks like Gamestop, Bed Bath & Beyond, Nokia, and AMC. Because the prospects of these companies do not appear to be very bright.
The ability to short stocks is viewed by some as a despicable behavior, the destabilizes financial markets. While on principle I find the practice of betting against companies concerning, it can actually help stabilize markets. Historically, shorting can help limit the prevalence of stock market bubbles. It offers a counterbalance to the mania and excitement that can drive the prices of some stock upwards.
Other beneficiaries of GameStop’s rise include Chewy Inc. co-founder Ryan Cohen, who joined the company’s board this month after building a 13% stake worth more than $2 billion, according to the Bloomberg Billionaires Index. The run-up has also boosted the wealth of Donald Foss, founder of subprime auto lender Credit Acceptance Corp., who owns a stake in GameStop worth about $1.1 billion” – Bloomberg Wealth
I appreciate the sentiment of Reddit users rallying together and sticking it to the big Wallstreet Hedge funds. But people should know this is not what is really happening.
The media portrays small investor Keith Gill as a thought leader sticking to his core beliefs in a company that will without a doubt make a grand recovery. The subreddit Wallstreetbets narrates the Gamestop stock price surge as an event that is allowing the average investor to make money instead of the usual Wallstreet big shots. This portrayal is shortsighted.
Gamestop is a struggling company. Those at the top of the company along with Gamestop’s largest shareholders will have the opportunity to get much wealthier off this mania. These are the people making the big money right now. Not the average dude buying one share of GME from his phone on Robinhood while watching Netflix.
Then things will come full circle. Wallstreet will make money on the shorts when the Gamestock stock price finally comes tumbling back down.
Gamestop Share Price
What is the real cause of the astronomical GME share price rise? Boredom, pure and simple. People are sitting at home, with some money from the government and desire to feel part of something bigger than themselves. Be careful. Unfortunately, this is not a David and Goliath moment.