Is the recent GameStop story highlighting how little stock price is based on reality?

[kdonnel]

I group of people on Reddit bankrupted a hedge fund and presumable made a fortune in the process.

Someone in the group noticed that a hedge fund had a massive amount of short trades against GameStop. That person convinced many in the group to join forces and buy as much GameStop stock as possible. This drove the price of the stock through the roof through this artificial demand.

The price rose so much that the hedge fund was forced to try and cover their short positions to the tune of over 13 billion. The hedge fund is in the process of declaring bankruptcy.

Trading firms are now saying it must have been illegal for the public to join together.

It looks like the same group has targeted other stocks as well, AMC, American Airlines, BlackBerry and others.

 

[dvcgirl67]

I've been watching this for a couple of weeks now, and not only is it insane, it's frightening in a way. It's like vigilante trading or something. As an index fund investor, it shouldn't scare me all that much I suppose. Obviously this isn't going to end well for lots and lots of people.

What I find hilarious is all of the folks on CNBC saying how horrible this is....etc. When CNBC is a version of this....all day, every day. CNBC turned the stock market into some kind of a gameshow, and now they're horrified that there are people treating it that way.

 

[FlightlessDuck]

The stock market is a sham. Stocks are worth money because people believe they are worth money. If you own stock in a company that doesn't pay dividends and never intends to, what you own is a piece of paper you are betting somebody else will want to pay more for eventually.

 

[JimMIA]

The GameStop/Reddit thing has nothing to do with the price of a stock.

The established price of GameStop was about $40 and a good many people thought that was overvalued. So they "shorted" the stock to a great degree thinking they would make money when the price dropped.

I don't know what GME is right now, but it was $483 earlier today, which most attribute to Reddit.

That is an indicator of the power of social media -- not economics, or intelligence, or savvy investing. It's an example of the ability to assemble a large herd of sheep...and then stampede them.

 

[FlightlessDuck]

The GameStop/Reddit thing has nothing to do with the price of a stock.

See, but it does. The value of the company hasn't changed just because there was more stock activity. Demand causing a change in price doesn't equate to an intrinsic value of the item. Like stamps or comics. Tulips. Beanie babies.

But in the end, the price still went up, even though GameStop is still the same company it was on Monday. All because people willed it to be worth more.

 

[Orion Nebula]

This is a pretty good explanation on what happened if anyone is confused;

For those that don't really know much about what's going on, essentially these billion dollar hedge funds were betting that GameStop (GME) was going to continue to lose value. They used a type of speculation called "short sale" where they borrow a stock from a broker, then wait for the price to drop, before they give it back and pocket the difference. They bled GME dry to the point where it was around 3.00 a share.

They doubled down. They blew past the 100% available stock cap of GME to the point where now they owe on stocks that essentially aren't there, around 140%. Frankly, that should be illegal.

Que WallStreetBets. A sharp user known as Deep*Value noticed a little over a year ago that these hedge funds had severely overextended themselves. He put a good amount of money into their stock and posted a whitepaper to WSB about his logic for doing so.

WSB saw that his reasoning was sound, so they started buying long term stock in GME. The thing about shorts, is that if you're holding them and the price rises, you're on the hook to pay your broker back for what you borrowed from them. Multiply this by millions of shares, and you have hedge funds dodoo their pants watching their funds being bled dry by a bunch of internet peasants who call each other stupid names on a Reddit forum.

They did it to themselves. Their greed was noticed and now people are punching back at them.

Oh, and Deep*Value's portfolio is currently sitting at 50 million.


Edit: The Robinhood App has banned buys of GME, AMC, BB, and NOK. They are literally stopping people from executing further trades. They are actively protecting the hedge funds that by their own poor management, put themselves in this position. Robinhood should be nuked into oblivion for this

 

[FlightlessDuck]

Edit: The Robinhood App has banned buys of GME, AMC, BB, and NOK. They are literally stopping people from executing further trades. They are actively protecting the hedge funds that by their own poor management, put themselves in this position. Robinhood should be nuked into oblivion for this

Webull did the same thing, apparently.

 

[JimMIA]

See, but it does. The value of the company hasn't changed just because there was more stock activity. Demand causing a change in price doesn't equate to an intrinsic value of the item. Like stamps or comics. Tulips. Beanie babies.

But in the end, the price still went up, even though GameStop is still the same company it was on Monday. All because people willed it to be worth more.

Stock price is not the company. The company is not stock price.

 

[Starport Seven-Five]

Gamestop is bringing it to the front page but this type of thing has gone on forever. Tesla is probably the most egregious example over the last couple years.

Market cap:
Tesla: 798B
Toyota: 204B
Honda: 48B
GM: 73B
Ford: 43B

I rarely invest in individual stocks and I stay away from ones that are making news because the price is rarely based on fundamentals. Always remember that “the markets can remain irrational longer than you can remain solvent”

 

[FlightlessDuck]

Stock price is not the company. The company is not stock price.

YES. This is my point.

 

[JimMIA]

A sharp user known as Deep*Value noticed a little over a year ago that these hedge funds had severely overextended themselves. He put a good amount of money into their stock and posted a whitepaper to WSB about his logic for doing so.

EDIT BECAUSE I GOT SOME NUMBERS VERY WRONG:

[GME was once valued as high as $56 in 2007, but gradually lost value over time.

From the middle of 2019 to mid-2020, GME was valued consistently in the $3.50 - $6 range -- down from a previous consistent valuation in the mid-teens (+/- $15).

During the Fall of 2020, GME gradually rose from about $5 to $18.84 on December 31, 2020 -- presumably due to the rising economy, Christmas purchases for homebound customers, etc. It was this price level ($19) that the hedge funds thought was overpriced and due for a drop.

But in the first two weeks of January, GME rose from $18.84 to $39.91 on Jan 14. From there, it went straight up, and is now headed back down, as you can see from charts of the stock.]

*****
In other words DeepValue was playing "pump and dump," just like the hedge fund big boys do. And he/she probably made a lot of money before they got out.

But the vast majority of the sheep will not be so lucky. When a stock is valued at $4.00 by the market based on years of experience and the business prospects of the company, sheep buy it at $250 and it's now at $400 -- that doesn't make sheep geniuses.

Those sheep are in deep trouble because they paid at least $246 too much, no matter what the current price happens to be. And they will follow the "pump and dumper's" advice to be serious investors and "Buy and Hold." Buy and hold so the pumper doesn't lose his money!

Or, as hedge fund billionaire Leon Cooperman said on CNBC this morning, "It's going to end in tears."

 

[gotomu212]

Edit: The Robinhood App has banned buys of GME, AMC, BB, and NOK. They are literally stopping people from executing further trades. They are actively protecting the hedge funds that by their own poor management, put themselves in this position. Robinhood should be nuked into oblivion for this

Robinhood specializes in unsophisticated novice trading. You have people dumping money into stocks that are beyond overvalued- many users that don’t have $500 to blow on a bad stock bet.
Halting trading is not protecting hedge funds, they are protecting these small investors that cannot ride a 50% one day loss on their investment (what’s happened to AMC today). People that jumped in very early and jumped out will make a lot, all these others are going to be like people that jumped into the Internet boom or 2006 housing flipping trend.

 

[JimMIA]

Robinhood specializes in unsophisticated novice trading. You have people dumping money into stocks that are beyond overvalued- many users that don’t have $500 to blow on a bad stock bet.
Halting trading is not protecting hedge funds, they are protecting these small investors that cannot ride a 50% one day loss on their investment (what’s happened to AMC today). People that jumped in very early and jumped out will make a lot, all these others are going to be like people that jumped into the Internet boom or 2006 housing flipping trend.

Maybe. But there is also another possible explanation.

Robinhood (and other similar companies) do not charge anything to process trades -- FREE stock trading...Woo Hoo!

So how do they make money? By arbitraging the difference between their actual purchase/sale order settlement and their customer's purchase/sale price.

If the market is moving too fast for them to keep up, they are taking big risks of losing money on those differences.

So they might have been protecting their customers; or they might have been protecting themselves.

 

[AlohaNow]

It's fantastic and horrifying to watch, all at the same time.

 

[DLgal]

Maybe. But there is also another possible explanation.

Robinhood (and other similar companies) do not charge anything to process trades -- FREE stock trading...Woo Hoo!

So how do they make money? By arbitraging the difference between their actual purchase/sale order settlement and their customer's purchase/sale price.

If the market is moving too fast for them to keep up, they are taking big risks of losing money on those differences.

So they might have been protecting their customers; or they might have been protecting themselves.

Either way, it's clearly illegal market manipulation.

 

[mefordis]

The GameStop/Reddit thing has nothing to do with the price of a stock.

The established price of GameStop was about $40 and a good many people thought that was overvalued. So they "shorted" the stock to a great degree thinking they would make money when the price dropped.

I don't know what GME is right now, but it was $483 earlier today, which most attribute to Reddit.

That is an indicator of the power of social media -- not economics, or intelligence, or savvy investing. It's an example of the ability to assemble a large herd of sheep...and then stampede them.

There are many, many examples of this i see on a daily basis, nothing to do with the stock market. The media does it constantly and very effectively.

 

[mefordis]

Either way, it's clearly illegal market manipulation.

Only if they traded on insider information, which they did not.

 

[JimMIA]

Either way, it's clearly illegal market manipulation.

You might be right. I don't know securities law.

I do think Robinhood made a mistake in shutting down certain individual trades for a period of time. That's just exposing your customers to opposing moves without any way to counter them. I guarantee you some hedge funds made major moves while Robinhood had their people shut down...and the Robinhood customers could do nothing about it. And some Robinhood customers have already filed lawsuits over that issue.

Both the collusion among thousands of individual players to cause a change in share prices, and the Robinhood closures, are probably things the SEC should look at.

 

[DLgal]

Only if they traded on insider information, which they did not.

No, the trading platforms selectively halted BUYING while still allowing SELLING. They cannot just arbitrarily stop trading in that manner. It serves only to tank the stock price, saving the hedge funds while screwing over the other investors. That is very clear market manipulation.

 

[MillauFr]

The stock market is a sham. Stocks are worth money because people believe they are worth money. If you own stock in a company that doesn't pay dividends and never intends to, what you own is a piece of paper you are betting somebody else will want to pay more for eventually.

Does any asset really have any inherent value? Isn't the value of everything really just based on trust?