What Consultants Say You Ought to Know About Investing In GameStop

Signage is in a GameStop Corp. store in Peru, Illinois.

Daniel Acker | Bloomberg | Getty Images

It’s the stock rally that nobody predicted.

In the past few years, GameStop, a video game retailer, has reduced its retail presence by closing hundreds of stores. But this week the stock burst dramatically.

On Wednesday, GameStop stock rose more than 100% during trading, closing at $ 347.51 per share.

The promotion was sponsored in part by Elon Musk, CEO of Tesla, the “Gamestonk !!” on Tuesday along with a link to a thread posted on Reddit by investors.

The rise in the stock was sparked by private investors who decided to take over short sellers of hedge funds that had bet against the company. AMC Entertainment’s shares also rose more than 300% when the markets opened on Wednesday on similar bets.

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The action was fueled by various influences: new trading apps and zero commission trading; Social media companies like Twitter, TikTok, and Reddit; and a corresponding flow of information.

“We’ve given people the tools to do something,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York. “And they did.”

The feverish interest in a single stock is nothing new. Some pundits said it may be time to prepare for a retreat after the market surge last year led investors to get involved with names like Tesla or Apple.

However, this week’s behavior is also unique due to the attention that retail investors have received due to the Covid-19 pandemic, said Dan Egan, director of behavioral finance and investment at Betterment.

Many people cannot go to a cinema, ball game, restaurant or bar and feel isolated due to a lack of social environment.

At the same time, social media companies use algorithms that serve to motivate people by paying more attention to certain content.

“I tend to think of this as adding an accelerator or jet fuel to a regular car engine,” Egan said. “All of these things add to the psychology here in ways that we haven’t seen before.”

How the rally could end

The excitement could end as quickly as it started – and investors need to be prepared.

The quickest way that could happen would be if the Securities and Exchange Commission said they were investigating unusual activity like market manipulation.

Once that happens, it could cool everything down, according to Egan.

“The air could come out of the balloon very quickly with very light official communication,” Egan said.

Alternatively, interest could decrease more moderately as the news cycle changes direction and attention to these companies decreases.

Once the vaccines are distributed and people return to more normal prepandemic routines, that substitute for normal contact will go away, Egan predicts.

“It will still be there, it will just be much, much smaller,” said Egan.

Risks to watch out for

Granted, to get great rewards, you have to take great risks.

This is one reason Boneparth said he doesn’t discourage customers from looking into individual stocks.

The best time to include these types of equity investments is after you’ve done your financial planning, secured your cash flow, identified your goals, and aligned your core resources to achieve them, he said.

“Once you’ve done all of this and done all of this hard work, it may be okay to take 5%, maybe 10% of your investable wealth and try to find some opportunities,” said Boneparth.

Make an inventory of your personal situation before risking your own capital on such bets, advised Sarah Newcomb, director of behavioral research at Morningstar.

If you are new to investing and do not understand the difference between market price and base value, or are thinking of risking money that you need for your financial security, reconsider, she advised.

“Just like you wouldn’t bring your rental money to Vegas, don’t risk your savings to guess what the herd will do next,” Newcomb said.

To reduce risk, try well-diversified funds or large-cap stocks that are less prone to these types of market fluctuations, she said.

One way to catch the uptrend when certain names are doing well is to invest in broader index funds, Egan said.

“You can just say, ‘I want to invest in everything. So when it goes up, I know I’ve invested in everything,'” said Egan. “There are very easy and inexpensive ways to do this without causing stress or really high tax burdens at the end of the year.”

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