r/WallStreetBets and the Stock Market

 Introduction

Last week, we saw 'Wallstreetbets', a community of investors shake the stock market by purchasing shares from failing US companies, forcing the share price to rocket. The community collaborated on the online message board site Reddit before simultaneously purchasing stocks from companies such as Gamestop, Nokia and Blackberry on the brink of liquidation, causing the share price to increase. 

Meanwhile, experienced stock market traders were losing significant amounts of money as they had effectively been betting that these companies would collapse. These investors were using a trading method called 'shorting'. 

The Reddit community have taken the stance that short selling is immoral and should not be permitted and found that boosting the share price of particular companies by purchasing shares in an organised time frame, the short sellers would not be able to profit, and in fact have to pay for the share price increase, potentially bankrupting some investors. This market strategy is known as a "short squeeze".

What is Shorting?

Shorting or short-selling is a method that investors use to bet on a companies share price will fall. Investors will borrow shares from a broker to sell in the market and if the price drops, they buy the shares back and keep the difference in price. On the contrary, if the share price increases, the investor must pay the difference in price. 

What does this mean?
As the share price sky rocketed, due to the demand of the likeminded investors purchasing the shares of the companies that experienced traders were convinced that the share price would drop, these investors are now required to pay the difference as required under the conditions of short selling.
This has publicised the short selling methodology and has raised ethical concerns as to how people should be permitted to profit from a company failing. The effects that this has had on the US Stock Market is likely to trigger an investigation or change of practices as a response.

Should we be worried?
Unless you are short selling, the simple answer is no. Not yet. These is some evidence to say that the events from the United States of America are being mimicked in the United Kingdom with some companies such as Cineworld but the 24% gain is little in comparison to Gamestop. Investors may want to consider creating limit orders to protect their investments as the market is likely to change rapidly should this offensive attack on short sellers become practiced on the UK stock market. Sell out at a price your happy with rather than being greedy and getting caught on the downward trend.

Automatic purchases and sells appear to continue to be processed even if the trading platform ceases activity due to the rapid changes. 

What happens next?
The primary targets for Monday 1st February 2021 appear to be AMC Entertainment Holdings Limited (NYSE:AMC), Gamestop Corp (NYSE:GME), Nokia Oyj (NYSE:NOK) and Blackberry (NYSE:BB) but the list is extensive. The Wallstreetbets group are also targeting the price of silver as it is believed that price of gold and silver is being manipulated to cover the real rate of inflation.

With the rush on purchasing shares in AMC Entertainment Holdings, there is a chance that Amur Minerals will see a spare price increase due to the similar abbreviations (NYSE:AMC) vs (LON:AMC) causing some confusion.
The potential UK companies that have been mentioned are Cineworld (LON:CINE), other likely candidates are those that have suffered harshly due to the COVID-19 pandemic and enforced closures of businesses to reduce the spread of the virus.