GameStop Mania Fuels Market Trends

GameStop Mania Fuels Market Trends

by February 18, 2021

By now, you’ve probably heard about the GameStop shares saga, which saw the about-to-tank software company experience a sudden rise to fame in the financial markets this year. In fact, the video game retailer has experienced an unprecedented 275% increase in share prices so far in 2021.

With the initial surge in GameStop shares driven by people banding together on Reddit forums, and multiple subsequent price surges thereafter, GameStop has become the buzz word in the financial markets right now. GameStop share prices peaked at a high of $483 and then tumbled down to $50, causing major losses for retailer investors who had purchased shares at the peak.

The sudden rush towards GameStop shares, however, is not necessarily a reflection on the company’s performance, as GameStop is actually losing money. The GameStop phenomenon has sparked some larger conversations around the new trends in the markets and how community-driven trading is becoming a force that cannot be ignored. Let’s take a look at how the GameStop shares mania has led to new trends emerging across the financial markets.

Is ‘Meme stock’ changing the game?

Justin Sun, the young cryptocurrency entrepreneur who bought $10 million worth of GameStop shares during the peak of its initial surge, has a few ideas about what this could all mean for the stock markets. Sun believes that the “meme culture” is something companies will need to latch onto, and that the current trend of younger people shifting towards financial assets is here to stay.

Sun thinks that the rise of internet-driven investing is an advantage for instruments like cryptocurrencies and shares of companies who are part of the so-called “meme stocks.” Wait—what’s a meme stock? The term meme stock applies to a particular stock that starts off cheap and with a relatively low market cap, which is heavily shorted (as in hedge fund managers speculate the prices will fall) but then makes a surprise move with unexpected volatility. Kind of like an internet meme, which comes out of nowhere and is suddenly everywhere. Sun went on to further illustrate his point about meme culture with a reference to Tesla founder Elon Musk, saying:

“Elon Musk is not only a company CEO, but he is also the representative of this kind of meme culture and the representative of this kind of new generation movement. In the future, these kinds of community-driven trends require company CEOs to be more engaged with the community, with their fan base.”

Sun believes so strongly in the trend shift that he plans to hold onto the GameStop shares that he purchased previously, even if he makes a loss.

GameStop shares trend not the first, but may stick around

The GameStop bubble is not a first, as similar trends have been seen before in the markets, and Jason Reed, a finance professor at the University of Notre Dame shares a similar sentiment to Sun saying,

“I do think that, to some degree, this herd Reddit movement is going to continue.”

Reed then went on to demonstrate this by saying,

“We’ve already begun to see the movement into other equities and assets, like AMC, Blackberry and silver gaining considerable momentum.”

While analysts say that more people trading in the markets is a good thing, there is also a growing concern that those who are trading on a whim, spurred on by social media, may be taking chances that they can’t afford to lose, and creating a risky new trend. According to experts, another trend that could arise involves traders getting put off when they see the massive losses some people incur from these kinds of spontaneous trades. For example, when Melvin Capital lost more than 50% in January on their GameStop trades.

David Sekera, chief U.S. market strategist at Morningstar said,

“After seeing several other funds get carried off the field on stretchers from these short positions, hedge fund managers will be much more cautious as to which stocks they will be willing to short.”

Needless to say, the GameStop phenomenon has shaken things up in the stock market and created quite a stir. In case the volatility of Covid-19 wasn’t enough, we now have community-driven trades creating a whole new trend which may further add to the unprecedented volatility in the markets this year.

 

Featured image credit: Photo by Dimitris Chapsoulas on Unsplash

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