by Matt Frankel, CFP | Jan. 27, 2021
1/28/2021 Update: Robinhood is currently restricting stock and options trades to just closing positions for GameStop, AMC Entertainment, BlackBerry, and Koss stock.
To say that the last few days in the stock market have been interesting would be a massive understatement, especially with stocks like GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC). As I'm writing this -- about 11:30 a.m. EST on Jan. 27 -- these stocks are up by 137% and 218%. Today. Trading is so frenzied that the popular trading platform Robinhood has reportedly experienced downtime today.
For investors sitting on the sidelines with cash in their brokerage accounts, it's only natural to wonder if there's more upside for these stocks. While I can't offer personalized financial advice, I can try to help make sense of what's going on so you can make a wise decision for yourself. Here's what you need to know.
The short answer is that we're seeing a massive short squeeze. Some big investors (hedge funds) sold many shares of GameStop short, which means that they borrowed shares to sell, hoping to buy them back at a lower price and make a profit. When more investors are trying to cover short positions than there are shares for sale, we get a short squeeze, and that's what we're seeing now.
While every short squeeze is different, here are the basics.
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In heavily shorted stocks like GameStop, this can go on for some time. In fact, GameStop's short interest was about 140% at the end of 2020, which means that for every 100 shares available to trade, 140 were sold short. That's a lot of short covering that could potentially happen.
There are a few important principles investors should keep in mind when it comes to short squeezes.
So, to answer the question of "how much higher could they go?" I'd have to say much higher. But they could also reverse course and go lower just as easily.
The short answer is probably not. GameStop has already gone from a low of under $3 to a share price of $357 as I write this. And it has moved in a $131 trading range today alone.
The bottom line is that participating in a short squeeze in GameStop, AMC, or any of the other stocks that are rallying based on something other than company-specific news is not much different than buying a lottery ticket. There's nothing wrong with doing a bit of speculation (gambling) if you know that's what you're doing. But I'd strongly advise against putting any money you can't afford to lose into these stocks.
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