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Why GameStop Stock Plunged 30% in Morning Trading Today

By Reuben Gregg Brewer - Feb 4, 2021 at 11:44AM

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The inevitable end to the short squeeze is proving to be swift and painful. But there are lessons here.

What happened

Shares of video game retailer GameStop (GME -3.56%) plummeted as much as 30% in early trading on Feb. 4. At this point the shares have fallen roughly 80% over the last five days. The thing is, nothing material has changed about the company in that time except investor sentiment.

So what

At this point the name GameStop is infamous in the mass media and among politicians because it has become the poster child for a series of short squeezes set off by a Reddit message board. Now that the hype surrounding the stock is waning, however, the stock is simply falling back to what the troubled retailer's fundamentals can support. And that's obviously much lower than the hysteria-driven highs reached just a few days ago. 

Two women in the front seat of a roller coaster.

Image source: Getty Images.

You can look at the mania here and simply dismiss it as a market anomaly. But that would probably be a mistake, because while market situations are never the same they often rhyme. In other words, the same general exuberance that investors have been watching in GameStop has happened before and will likely happen again many more times. The trick is to learn and remember. Indeed, it's important to keep in mind that there were investors who bought the stock at the top hoping that the uptrend would continue. Obviously it didn't and somebody had to be left holding the bag.

Now what

GameStop is not a stock that most investors should be buying right now. That, however, doesn't mean that you should ignore the rollercoaster ride the company's shares have taken. This is what irrational exuberance looks like on the way up and the pain that can happen on the way back down. Don't let this learning opportunity go to waste.

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