Local investment expert explains what is happening with GameStop, AMC stocks
WRIGHTSVILLE BEACH, NC (WWAY) — Hedge fund managers bet on stocks they expect to fall and information on those stocks is easy enough to find if you know where to look. On a stunning day of trading, day traders following tips of Reddit put the stock market into a tailspin on Wednesday.
Wrightsville Beach Investment Manager David Allison explains that trading pros are facing losses because Reddit traders seemed to have figured out how to beat the odds.
“These speculators on these social media platforms have figured that out, figured out which stocks are heavily shorted, and targeted them,” Allison said.
Short selling is when an investor borrows a stock, sells the stock, then buys the stock back to return to the lender. Short-sellers bet that the price of the stock with fall and they’ll make money on it.
A group of traders on Reddit bought stock in GameStop, AMC, and other shorted stocks on Wednesday, sending the prices up instead of down like the hedge fund managers were betting on.
In turn, Allison says those managers, as a condition of the borrowed stocks, have to either buy the stock or cover their short position to limit their losses. This causes the stock to continue to climb, causing what is known as a short squeeze.
This time, Allison says large investors are losing big in a scenario that he has never seen as an investment manager.
“Usually, they do this type of thing to each other, right? In this scenario, the retail investor has sort of figured out how to band together and is now doing this to the hedge fund managers,” Allison said.
However, what goes up must come down.
“After it kind of works its way through the market, the stocks tend to fall almost as fast as they went up,” Allison said.
This is what happened to GameStop, which dropped precipitously on Thursday.
Allison advises speculators to be careful, saying many people likely lose a lot of money when the stocks begin to fall.
Overall, not recommending this type of trading and reassuring everyday investors are not at a risk for loss.
“The average investor out there that is putting money in a 401K systematically, owns a diversified portfolio, and owns mutual funds or something like that in their retirement account isn’t really affected by this,” Allison said.
The takeaway is the average investor, the average 401K, and the average retirement savings are not impacted by these types of events. It is not something most investors need to be worried about and Allison says it will not likely affect the stock market as a whole.