The stock market is a rather unnerving mechanism; It is a creature that operates beyond the confines of the human imagination. Trend lines move unbeknownst to even the best of investment analysts – one can predict, but there is never a one-hundred percent certainty of the direction in which the market will move. Despite its seemingly complicated and intricate nature, the essence of the system is quite simple. The line will move where the masses want it to move. If the majority of stockholders believe that a company is performing poorly, they will sell their stock in the company, and the same applies the other way around; The stock market is unpredictable because the element of human influence is unpredictable.
Getty Images / DigitalVIsion / Alistair Berg
A good example of such unconventional movements within the stock market would be of the recent GameStop stock price surge. Over a mere six-month period, the GameStop stock price increased significantly – by almost eight thousand percent. The entire craze stemmed from an infatuation that a few amateur traders had with the GameStop (abbreviated to GME) stock. This interest of theirs came from the fact that a vast number of hedge funds engaged in the short-selling of the GME stock – in other words, these funds were essentially betting on the downfall of the company.
On the ‘Wall Street Bets’ online Reddit discussion forum, a few amateur traders began to encourage the masses to purchase the GameStop (GME) stock to make sure that short sellers were caught out on this sudden wave of GME stock purchases. This essentially facilitated a short squeeze. A short squeeze is a circumstance in which short sellers are either forced to buy additional shares in the company as the stock price rises or cover their stock position altogether by continuing to short as the price increases.
The GameStop price surge shenanigans emphasized the role that public sentiment has to play in the stock market. The company could be performing poorly, but if the people are with it, its stock price will rise.