Inexperienced learners to learn: Gamestop riot doesn't just have winners

Tuesday, February 02, 2021

Inexperienced people pay hardship
Gamestop riot doesn't just have winners

After the rapid increase in Gamestop shares last week, the situation is now slowly calming down. It remains to be seen whether inexperienced small investors could bring brokers and shortsellers to their knees.

The days of spectacular price jumps in the shares of the US video game retailer Gamestop and other companies as well as silver are probably over for the time being. But as is common with speculative bubbles, there are few winners and many losers. Gamestop titles on Wall Street collapsed by a good 30 percent at the beginning of the week and slipped by a further 25 percent on Tuesday before the market. At just under $ 169, they were worth less than half what they were at their record high last week. The price of silver slipped more than five percent at times during the day to $ 27.44 a troy ounce (31.1 grams) after hitting an eight-year high of $ 30.03 on Monday.

According to experts, inexperienced small investors in particular will have to pay hardship. They often got on when a course had climbed quite far and hesitated too long before selling. The losses can be particularly painful for those who bought stocks or silver on credit. Usually, brokers give their customers an overdraft facility, depending on the size of the portfolio, in order to speculate. Because it allows investors to spin a bigger wheel, they can maximize their profits as prices rise. But if the market runs against them, the losses are multiplied.

This situation is exacerbated by so-called "margin calls" from brokers. In the event of increasing losses in an investment, they demand additional security deposits, known as "margin". If the customers cannot find this, the paper will be forcibly sold regardless of possible losses.

Thomas Peterffy, Manager at Interactive Brokers, estimates that around half of the total of 1.2 million customer accounts are buying securities on credit. Several thousand "margin calls" per day are normal, but their number has increased noticeably recently. Brokerage houses TD Ameritrade and Robinhood refused to comment on how many of their clients speculate on credit. Competitor Charles Schwab left a request unanswered.

In the beginning, shortsellers were the big losers

Forward transactions play a big role in the hype and Gamestop & Co. experts say they have fueled the rally in recent weeks and could now accelerate the downward trend. During the price hike, brokers had sold so-called call options to customers on a large scale. In this way, they secure a security, a currency or a commodity at a fixed price. At the same time, the brokers immediately stock up on the underlying asset on the exchange in order to deliver it to the customer when the option expires. If you wait, there is a risk of losses if the price rises above the agreed option price. If, on the other hand, the stock exchange price falls below the option price, brokerage houses could throw the shares or commodities on the market on a large scale.

On the other hand, the buyers of calls face a total loss if the underlying does not reach the agreed purchase price. Then the option expires and is worthless. At Gamestop, however, there are currently only a few call options open, said Christopher Murphy, senior investment strategist for derivatives at brokerage firm Susquehanna. Buyers would usually have redeemed them on the same day. With "put" options, however, it looks very different, warns the industry service Trade Alert. There are still relatively many in circulation here. With these papers, buyers secure the right to sell a security, currency or commodity at a set price. If the stock exchange price falls below the agreed option price, the seller of the puts is threatened with losses.

The "shortsellers" – investors who bet on a price decline – were the big losers at the beginning of the price volatility at Gamestop. They borrow stocks to sell right away. Your goal is to buy the papers cheaper on the exchange until they are returned. They reap the difference as a profit. Small investors had forced shortsellers with concerted purchases to dissolve these bets, sometimes with high losses.

The rapid rise in prices then attracted new investors who placed similar bets. The current price slide offers them the opportunity to reap profits, says Ihor Dusaniwski, managing director of the analysis company S3 Partners. Others could jump on this train and accelerate the downward slide with further bets on a price decline.