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Is It Gambling Or Investing?

February 25, 2021

2017-06-27_Blog-QuarterlyPerformance

The recent headlines about GameStop, AMC Entertainment and Blackberry are classic examples of gambling versus investing.

GameStop is a company that sells video games in stores while the trend is downloading games. Investors, especially in hedge funds, felt this was a stock whose business model was becoming obsolete. So, they shorted the stock.

We won’t get into the nuts and bolts of shorting but on a macro level, if you decide a stock is going to go down and you want to profit it from it, you borrow the stock, in this case GameStop, and write an option to buy it when the price of the stock actually goes down. You do pay for the option. These “short sales” have an expiration date.

If the short seller is wrong and the stock rises before the expiration date, you have to buy the stock to cover the option that assumes the stock is going down.

What happened was a group of individual investors through social media decided to challenge the hedge funds. They kept buying the stock to make the price go up (more demand than supply so the price keeps rising). In fact, GameStop rose 14,300% at its high! It has since come down to earth. The share price as of 2/9/2021 was $50.31. The high was $483.00.

The individual investor was not “investing” in GameStop, they were “betting” to squeeze the hedge funds. It worked for a while. The hedge funds lost an estimated $5 billion trying to cover the short sale options.

When the investors “bet” on a stock, especially as a fast way to make a buck, many feel a line in the sand has been drawn in the bull market cycle. An investor buys a stock because of its underlying value believing money can be made as the company grows their profits. Not so a gambler.

What occurred with GameStop is gambling. Not surprisingly, the SEC is reviewing this event.

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