Let’s recap the madness around GameStop: A lot more losers than winners

Financial markets were rocked last month by the frenzy around GameStop. It was one of the biggest speculations in recent years. Let’s face it GameStop is a terrible company to buy, awful fundamentals and expensive price. Investment funds recognized that and took short positions. However this created an opportunity for “short squeeze”. As you know an populist group of trader started the frenzy for buying GME on the forum and began pumping up the price to squeeze those funds.

The idea for this move is that they buy the stock at $30, pump up the price to $100 and then funds have to cover their shorts and buy those shares at $100 and this makes very nice 300% profit. However this ONLY works for those who bought in the beginning! Because in order to pump up the price to $100 you need other fools to buy it as well at $50, at $60, at $110, and those fools are actually used by the initial group who started the squeeze.

Also social media works with a lag, so by the time the huge frenzy started the price was a lot higher, but this is what is required – more and more people buying into the speculation. It worked like chart the volume of shares that changed hands exceeded 100M in the hottest days of the frenzy. So when big funds started to cover these short positions, most of the people have bought the stock at very high prices and actually lost money. See here:

As of today (02/10/2021) the price of GME is around $50 so only people bought before 22nd of Jan have positive return (if they still hold the stock). All those retail traders who traded the stock in the frenzy of 23rd -26th and still hold the shares are in a big trouble and this quite a big number of people:

In broad estimation (if indeed most of the investors are retail traders) then we are talking about millions of people. So the total volume of shares that was traded when the stock price was higher than today was 1,082M, we take only half (because it’s a 2-way deal and for error margin), then subtract the short volume and assuming each retail investor puts $5000 then the number of people who bought when the stock was highest were more than 4 million. Those people played a role for a typical patsy in a speculation deal.

Actually here is the breakdown between winners and losers:

As you see its not only loss, it’s a BIG loss – around 80% on average. To put it in perspective: lets say you read the frenzy and bought the stock at $110 hoping for those easy money, what are doing today when the price is $50?

So to see how the speculation works, here is a scatter plot between volume traded and return as of today:

In order to be successful you need lots of people buying (after you already bought!) and pumping up the price – in this way you will win big, and they will get even or most likely lose money. This is exactly what you see on the chart – with the increase of volume (as more people bought in the scam) their returns plummeted and got negative.

To conclude I have to say that retail trading is awesome and give many opportunities. However it is extremely dangerous because those people are not professional and are prone to manipulation by “guru traders”, “helpers”, “fighters for justice”. GamesStop case is a great example. Actually we started this website with the idea to help inform retail investors (not give tips or great wisdom) just inform on the quality of investments!

So did you lost money in GME? Tell us in the comments!

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