LEXINGTON, Ky. (LEX 18) — One day after buy orders were halted, trading of GameStop Corp. (GME) resumed today, and it was just as volatile as ever, with swings of roughly two hundred points in both directions between the opening and closing bells. The stock price went from a 52-week low of $2.80 per share back in April to a high of $438.00 achieved during trading earlier this week. So how did this happen, virtually overnight?
“Investors got together and said, ‘Let’s all get together and start buying this stock,’” explained Dr. Russell Jame, a Professor of Economics at the University of Kentucky. “It’s going to push the stock price up and push back against the short sellers,” he continued, before adding the understatement of the year, when saying it’s been “effective.”
It was so effective, several brokers halted all buy orders on Thursday, prompting anger from those who feel the system has already been rigged for the wealthy. Dr. Jame doesn’t, however, believe it was done to intentionally harm the retail investor.
“I just think from a liquidity standpoint they didn’t have enough capitol to provide to clearinghouses so they had no choice,” he said, before adding it’s not the role of the brokerage house to determine if and when the price of a stock is too high to consider buying.
Dr. Jame explained the process of the shorting a stock, which is often done by hedge fund managers to essentially hedge their bet. They will rely on stock prices they feel are overvalued and as a result will eventually drop.
“They borrow the shares with a promise to pay them back later. So let’s say a stock price is $100, you borrow the shares, and the price falls to $50. Then you return what you borrowed, and buy up shares at the lesser price, and there’s a profit,” he explained.
He also offered a few shares’ worth of advice to anyone holding Game Stop stock while it’s sitting above $300 per share as of Friday’s close.
“If you want to be a smart, stable investor, sell out of the stock, put in in a low-cost index fund and hold it for a while,” he said.
Dr. Jame believes the price of this stock will eventually return to price levels more in line with its history.