GameStop: be careful of the Reddit revolution

We need to talk about GameStop.

Before this year, most of us knew it as the US video game retailer that made the meme pages through seemingly short-changing customers on trade-ins.

In 2021 though, the stock has become the rope in a tug of war between a mob of redditors and the industry pros.

The short version is that individual investors banding together on r/wallstreetbets didn’t take kindly to some big money managers betting against the GameStop recovery plans.

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With new additions to the board and a new strategy in place to increase GameStop’s online business, the company attracted small-time investors who could see the value the plans could unlock.

But some big houses weren’t convinced, with larger players like Citron Research betting against the strategy in light of Amazon’s online dominance.

The result has been an incredible story of the institution-wary crowds sending the price skyward in a two-fingered salute to the short-sellers.

The company fundamentals have gone out the window but that’s maybe not the focus now. 

A lot of the energy has gone into reminding the industry stalwarts that individual investors are still there and shouldn’t be underestimated.

But there is a less savoury side to the saga.

There is some suggestion that market manipulation is taking place within Reddit and other platforms, with some users potentially disseminating false or misleading information to influence share prices.

Of course, that's a criminal offence with pretty hefty consequences.

So it may well be a short-lived lesson but, a sign of protest or not, GameStop shares continue to swing wildly.

And this is where investors could really get caught out if they let the hysteria take hold.

It’s all fun and games until the GameStops

What’s happening now might not have been seen before but the market mania within it definitely has.

Stocks shooting the lights out regularly attract investors who want to jump in and get rich quick. 

It happened 20 years ago when anything with a ‘.com’ suddenly became a stock market hit. In hindsight, those enormous valuations scream sell. 

A lot of seasoned investors stayed away altogether then, just like today.

The reality is that chasing stocks to the moon can leave you stranded somewhere in space or, even worse, hurtling back down to Earth.

The business fundamentals of the likes of AMC, BlackBerry, Nokia and GameStop have now left the building.

We’re already seeing evidence of the dump on the other side of the pump, with a lot of investors signalling they plan to bow out of the story in after-hours trading.

Be very careful not to use your savings to play a game of chicken or send a fleeting message to the hedge fund tycoons. 

Remember our principles for good investing and keep focused on the long term - we don’t want to see anyone get hurt out there.

For more tips on managing market volatility, have a read here.

Learn more:

How to invest in the stock market

Savings vs investing - which is better?

Detailed guide to investment risk

Investing in penny stocks

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