Terrance Odean, professor in UC Berkeley’s Haas School of Business, studies retail investor behavior. Having recently co-authored a paper about the online trading app Robinhood, Odean said he did not invest in GameStop stock.
“I don’t like to speculate on a whim and I don’t have time to carefully study these stocks,” Odean said in an email. “I realize that even if my analysis of fundamentals were correct, prices might move the other way.”
Stock prices of the brick-and-mortar video game store skyrocketed last week, peaking at $483 after having experienced a low price of $4.50 in August.
The recent GameStop price surge was spearheaded by a Reddit supgroup known as WallStreetBets after information was disseminated about various hedge funds holding short positions, according to Christine Parlour, Sylvan C. Coleman chair of finance and accounting at the Haas school.
Somewhat unique to the recent frenzy is the degree to which retail, or nonprofessional, investors were discussing how their collective action can push GameStop’s share prices up, causing hedge funds who shorted the stock to potentially lose, according to Odean.
“What is unusual, but not unprecedented about Gamestock in the last week or so is that there has not been significant news about the business side of Gamestock but there are huge differences of opinion about the value of the stock,” Odean said in the email.
Stock prices are set by buyers and sellers. When the demand to buy a stock is greater than the desire to sell, buyers incentivize current owners to sell their stocks by offering higher prices, according to Odean.
Share prices can go up when good news about a company is released or when both current owners and potential buyers agree that a stock should be valued higher than its current price.
Investors who believe a stock is overvalued and do not own that stock can bet the price will decrease by short selling a stock, Odean added in the email.
“A short position is where one borrows the stock from a broker and sells it. After the price falls, you buy it back and return it and make a profit,” Parlour said in an email. “However there is risk as short sellers make substantial losses if the price rises.”
For instance, Melvin Capital Management LP, one of the hedge funds that heavily shorted GameStop’s stock, lost 53% on its investments in January.
When investors have negative information on a stock, short selling can act as a mechanism to keep the prices closer to the fundamental, Odean said in the email. For this reason, financial economists have often defended short selling, despite past events of market manipulation having been tied to the practice.
According to Odeon, he is uncertain whether retail investors’ actions surrounding GameStop constitute market manipulation.
“If the investors are buying because their purchases will drive the price higher, or selling solely to drive the price down, that isn’t legal,” Odean said in the email.
While Odean said he does not know what will happen in the short run, he expects the stock’s shares to be traded for a lower price from the previous week.
As of press time, GameStop stock is being traded for $90.