How to invest in GameStop from the UK

GameStop business model

GameStop Corporation is an American company founded in Dallas in 1984 specializing in the video game industry. It is one of the largest video game retailers in existence, operating more than 4,800 stores in the United States, Canada, Australia and Europe.

It went public on the New York Stock Exchange in 1988 and since then has traded on the stock market like any other company. It has had some very good years and some not so good years, which, although it cannot be said to have been completely bad, have been years of decline.

This company stayed off the radar for a long time until January 2021 when its share price skyrocketed by more than 1,500% in just 3 days, only to return to its average the following week. As you can imagine, all this movement generated huge gains for those who positioned themselves in the right direction.

GameStop, Reddit and Wall Street

Behind these absurd moves, a large number of people belonging mainly to a Reddit forum called WallStreetBets were involved. This forum, as its name suggests, is all about “Wall Street betting”, although in the case of GameStop what they were looking for was to beat the whole Wall Street game.

This is how the idea spread from WallStreetBets to other forums on Reddit, motivating more and more people to buy GameStop shares. The end result was a buying frenzy that drove the price up to the level it reached and then back down to the mean.

Upon investigation, it was learned that it was a user who had bought about $50,000 worth of Reddit stock who initiated the move after the company had a dismal outlook. Having achieved his goal, he probably withdrew by selling the shares at a very high price, taking huge profits out of the market.

But, just as there were those who gained, there were those who lost a lot because in the buying frenzy, many entered too late. And by this we mean when the share price stopped rising and started to fall.

The commotion was such that the term meme stock has been coined to describe stocks that have sharp price movements motivated by social networks.

Assets that exist

Foreign exchange

What is known as Forex trading consists in the exchange of currencies. It is the conversion of one currency to another, and the aim is, evidently, to obtain a benefit out of this.

If you decide to trade EUR and USD, for example, you speculate how many dollars it will take to buy a euro, with the expectation that the euro will rise compared to the dollar. Therefore, if you bought each euro for 1.15 USD and you sell them back when their price is 1.20 USD, you'll be keeping that difference.

You may be thinking by now that this form of trading requires high investments, and you are not wrong, because fluctuations are usually minimal, and often you will need to use high leverage (which sometimes can be too much of a risk). Our recommendation for those who are new in the world of trading is not to start with Forex, but with a safer and more secure market.

Most currencies are available on this broker but remember that in Forex sales are always made through CFDs, therefore you will not be the owner of the underlying asset.

About Contracts for Difference

It is possible that you have found the acronym CFD more than once if you already registered on this broker. We will come back to it, but you should know first that CFDs on this broker are only possible if you short sell.

We will also refer to concepts like leverage and “going short”, in case you are considering day trading cryptocurrency or more advanced operations.

With CFDs you can operate on the platform even if you are not “in the black” or having a negative balance. For instance, you have the certitude that the GameStop will fall, so probably you think that it is better to refrain from getting in until it actually falls. However, if you are pretty sure that it is going down, why not take advantage of that?

You can do that by “going short”. More or less, it works like this:

  • You ask for a loan of, let's say, 100 units of GameStop, which cost $ 5,000 at the moment (these numbers are made imaginary)
  • You make $ 5,000 by selling them at the market price
  • As you supposed, it devaluates, and the unit of GameStop goes from $ 50 to $ 30
  • Again, you buy the 100 units, but now they are worth $ 3,000
  • Now you pay back the 100 units to whoever made the loan
  • There: the $ 2000 difference is yours

It is far more simple than it may seem. Just remember that by trading in GameStop on this broker, you can earn money if you anticipate downs in the price.

How to use leverage in trading

Have you heard about “leverage”? We'll put it simply: the good thing about trading is that it lets you invest even more than you can have in a given time. For instance, if you have $ 100 and you choose to leverage x2, you will be actually investing $ 200.

Why using leverage and how to do it

Assuming that, for example, you are sure that GameStop price is going up, and that you have $ 1,000 for “going long”, you must know that you have the option of investing more and making more money.

There's the possibility of requesting a credit at your bank, but you must know that all the process takes time, and by the moment you receive the money, GameStop might be already at a much higher price, so you wouldn't be able to invest the way you planned.

Using leverage, you can get that amount of money with two clicks. It's exactly like a loan, but much easier and quicker, and with the advantage that you will be getting it directly from your broker which will let you invest much more than you have on the platform's wallet. Before trading, you will see the leverage options as in the screenshot:

apalancamiento

Within other markets, the ability to leverage is greater. The reason: leverage is most common in short-term operations or day trading, and cryptocurrencies tend to be a medium or long-term investment. That said, I'm going to explain better how leverage works:

  • If you decide to invest $ 1,000 and you use leverage x2, you will be starting with $ 2,000 ($ 1,000 was “borrowed” from your broker). 
  • Then, turns out that GameStop price does increases, as you thought, and now the price of your investment is $ 2,400 (20% higher), so you decide to sell back. 
  • Once the $ 1k from leverage is returned, you will have $ 1,400 left; which means the net profit is $ 400, since the other $1,000 was yours from the beginning.

As you can see, with $ 1000 you get $ 400, in other words, 40% more. Not bad, right?

It may sound too good to be true. The trick is that the risk of losing out is also there. If everything goes as planned, you will earn profits in little time; but in the opposite scenario, you will also lose more really fast.

For instance: if the price falls by 10%, you do not lose $ 10, but twice (the leverage) that figure, that would be $ 20. For that reason, the concepts of Take Profit and Stop Loss are fundamental when operating with leverage.

Take Profit is used as a form of reducing risks when trading. When you enter, you can set a profit limit and ask that your position is automatically closed when the asset reaches a price. 

If you bought GameStop shares at $ 100, you can ask your broker to close your operation when it reaches $ 120. That way, you make sure you won't be blinded by greed and decide to wait a bit longer in case it keeps rising, which could make you lose it all.

Stop Loss is even more important, particularly if you use leverage, since a small loss with leverage can be fatal for your wallet. Consider that the broker will recommend a limit for Stop Loss, but it is better to place it lower than that.