Investor caution key as GameStop shares soar

Investors need to remain cautious as GameStop shares more than doubled on Monday. This after a post from the Reddit account that fuelled the 2021 meme-stock frenzy revealed what seemed to be a $116 million investment in the game retailer.

Indeed, GameStop shares rose as much as 105% in premarket trading on Monday.

And if these gains persist, the stock’s market capitalisation would increase by approximately $8 billion.

Meme Stock Mania Resurfaces

As I was quoted by CBS News, Sky News, and Financial Mirror, amongst other media, these rapid, significant, headline-catching figures are likely to draw another massive wave of interest and investment.

According to a Bloomberg report on the day: “The June 2 screenshot by Keith Gill, who goes by DeepF— Value on Reddit, shows five million shares bought at $21.27 apiece. It was the account’s first post in three years. The screenshot, which also included 120,000 call options worth $65.7 million due to expire on June 21, couldn’t be verified. The options would allow him to buy the stock at $20 a share.”  

After Monday’s closing bell, Gill posted another screenshot showing he retained his stake of 5 million GameStop shares. Equating to around 1.8% of its publicly available stock, and 120,000 call options.

Between 2020 and 2021, he emerged as a key influencer. He was instrumental in motivating numerous day traders to heavily invest in GameStop and sparking the meme stock craze.

Echoes of the Past and Potential for Pain

Short sellers, whether individual investors or hedge funds, expect the price of a particular stock to fall. They borrow shares of this stock, sell them at the current price, and then buy them back after the price drops, profiting from the difference.

As I said last month, I believe the frenzy will continue throughout the summer. Especially with influencers like Andrew Tate involved. Their influence is immense, and it’s going to be a rollercoaster ride.

This is a revival of the trend from 2021 and 2022. Back then, many individuals, often young and inexperienced investors, suffered significant losses. Undoubtedly, investors will get burned by this frenzy as well.

A Cautious Approach is Key

As such, I would urge everyone to be extremely cautious with meme stock trading that’s being driven by social media.

Naturally, many investors could make big money. But to be very clear, this is extremely speculative, and valuations can be expected to swing wildly in both directions.

I believe it’s more gambling than investing.

Consequently, if you want the thrill or novelty of chasing big gains, make sure you have a sound, diversified, long-term plan in place beforehand.

The original meme stock rally of 2021, driven by Keith Gill, was sparked by a surge of new retail traders entering the market. Many of these traders had additional liquidity from pandemic stimulus measures and historically low interest rates.

Therefore, although the enticing figures may be tempting, real risks are involved.

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