On Friday (01/29/21), I posted my brief thoughts on the trading on GameStop (ticker: GME) and my advice, which was – avoid.
Today, GME is down 50+% on the day, and down 77% from the high.
This stock’s price action will swing from short-squeeze to margin call in less than a week. Just amazing.
My thoughts, today – avoid.
Again, the long-term prospects for the company aren’t good. However, sometimes a stock price can become disconnected from the fundamentals of the underlying company. In this case, it definitely has. When that happens, it becomes a gamble rather than an investment.
So, the “little guys” that were looking to short squeeze Wall Street fat cats are now looking at losses, and if they borrowed money to do this, magnified losses, with the possibility of a margin call.
If you don’t know what a margin call is, it’s essentially when an investor has invested all they have, and then borrowed money from their broker to buy more stock. However, there are certain equity requirements for being on margin. When the entire portfolio is below the required equity threshold, the broker will “call” (today, email or text, most likely) the investor to have them either infuse more funds into their account to raise their equity to the required percentage, or to sell stock to cover their margin loan balance.
The popular investing method for these investors buying GME is the Robinhood website/app. And yes, Robinhood does allow for margin investing.
I won’t say that using margin in a portfolio is wrong – there may be times when it makes sense, but that’s not on GME. But taking any position in GME is currently a gamble, and you should never borrow money to go to Vegas.
DECADES to Wealth 