The year 2021 has been interesting from an investor perspective. We could state there is a clear battle between retail investors and so-called professional investors like hedge funds, investment banks, banks and big investors. The reason for this statement is the case of GameStop Inc. GameStop saw its stock price rocket from $17,25 at start of January to $347,51 on January 27th, a huge 2 015% increase with a high of $483,00. Partially driven by Robinhood traders, but also by other retail investors who saw a opportunity to make money in the market. Why did the large price swing cause media headline and cause trading limitations impose by Robinhood?
First let me explain what a retail investor is, a retail investor is a non-professional investor who invests small amounts in the market using traditional brokerage firms or platforms.
GameStop shortly, a Fortune 500 company headquartered in Grapevine, Texas, games and entertainment retailer. They have physical stores where games and entertainment is old to customers. At least in 2020 the business earnings per share was negative and not anything to admire, based on the business and earnings it is understandable that many professional investors have shorted the stock. Basically the company is surviving yet does not seem to be a great business, from my perspective as I cannot identify a moat in the business other then the physical stores.
Let us look at where it all started, apparently a retail investor made a proper analysis of the company back in February 2020 and started buying the stock. He was also an active in the Reddit forum wallstreetbets. As far as I listened to the clips the way of analysis is the same learned in Universities and Busines Schools so therefore must give him credit for a job good done. The difference is his perspective differs from the short sellers. This means he sees value in the company and an opportunity while short sellers just saw a dying business as sales of physical games have decreased.
Since September 2020, the stock price rose above $7 for the first time in a long time. The big bounce happened in January as you can see in the opening text a high of $48s was a huge upswing for the company value.
What happened in January and how come the stock price of GameStop exceeded $300?
The stock could rise this high partially due to a short squeeze, where the short sellers (hedge funds mainly in this case) had to cover their positions in order not to lose the whole investment or to lose all of their investors money in the whole fund. What also helps rallies is when other investors see the opportunity to make a small amount of money and start bidding up the price. This increase pressure on short seller to quickly cover their positions and are forced to pay whatever the price is on the market, pushing up the price even further.
To summarize this interesting case it shows that retail investors in a group can have the same affect as hedge funds or active investors when they take positions in companies. Just look at Carl Icahn, Bill Ackman and not the least when Berkshire Hathaway buys shares in companies. They all can impact market prices and have investors following their moves to achieve almost the same gain as expert investors.
What we can learn from this is that small investors in masses have the same saying as big money. Should small investors be affraid of Governments due to this case? Not in my opinion, without the small investors a lot of companies will go belly up as no one will use their services and the big money usually pay a fraction of what small investors do. Even thought Robinhood does not charge transaction costs.
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