About the company
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.
What kinds of financial assets can you trade?
Foreign exchange trading or Forex consists, as the name says, in the trading of currencies. In other words, is the conversion of one currency to another to make a profit through the operation.
In case you want to exchange the EUR/USD pair, you speculate how many dollars it will take to buy a euro, with the expectation that the first currency (the euro) will increase compared to the second (the dollar), to make a profit by selling it. Let's say you entered when a euro is worth 1.10 USD and you leave when a euro is worth 1.15: that difference is yours once you sell again.
You may be thinking that this form of trading requires high investments, and that is correct, because variations are usually minimal, and often you will need to use high leverage (which is an important risk). Our recommendation for those starting in the world of trading is to choose another market to begin with, since Forex is not the safest.
You can trade with almost every popular currency on this broker but remember that Forex trading works through contract for differences, thus you will not be the owner of the real asset.
About Contracts for Difference
If you browsed this broker before, you probably noticed that the initials CFD appear repeatedly. Before we come back to it, we must say that CFDs on this broker are only possible when you short sell.
We will also explain concepts like short-selling and leverage, in case you are thinking about day trading cryptocurrency or other more advanced operations.
The good thing about this broker is that it lets you bet both “in the black” and “in negative”. In a hypothetical case: you believe that the GameStop will fall, so perhaps you consider that the best thing to do is wait until it does and then go in. However, if it really falls, it might mean extra money for you.
The operation known as “going short” will allow you to do that. It works, roughly, like this:
- Someone lends you, let's say, 100 units of GameStop, with a total value of $ 5,000 (these are completely imaginary figures)
- You make $ 5,000 by selling the 100 units
- As you presumed, it depreciates, and the unit of GameStop goes from $ 50 to $ 30
- You obtain the 100 units again, but their current value is now $ 3,000
- You return the 100 units to the person that loaned them to you
- You save the $ 2000 difference!
Consider that it seems much more tricky than how this broker CFDs actually work: we can summarize this whole operation by saying that by trading in GameStop you can also earn money if you anticipate the downs.
What is leverage?
If you still don't know what “leverage” is, we'll put it short: it is the possibility to invest a higher amount than you actually have. For example, if you start with $ 100 and you leverage x2, your initial investment will be $ 200.
What you need to know about leverage
Assuming that, for instance, you are positive that GameStop price is going up, and that you have $ 1,000 for “going long”, you must know that you can increase your investment and earn higher profits.
There's the possibility of requesting a loan at your bank or other financial company, but you must know that all the process takes time, and when 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 obtain that amount really easily. It's like a loan, but much easier and quicker, and with the benefit that you will be getting it directly from your broker which will let you invest much more than you have on the platform. It is really simple, before investing you will see the different options as in the image below:
When operating in different markets you can use higher leverage. This is because cryptocurrencies regularly represent medium-long term investments, and leverage is used mainly for day trading or short-term trading. Let's talk a bit more about how leverage works:
- If you decide to invest $ 1,000 and you use leverage x2, you will be starting with $ 2,000 (remember that$ 1,000 are a “loan” from the broker).
- Then, turns out that GameStop price does rises, as you assumed, and now the price of your investment is $ 2,400 (20% more), so you decide to sell back because you want to play it safe.
- The $ 1k of leverage will be deducted, and you will have $ 1,400 left; which means you've earned $ 400, since the other $1,000 was yours initially.
By starting with $ 1000 and getting $ 400, you'll be earning 40% of your investment. That is pretty good.
But watch out: if everything goes ok and the price rises, you will make profits. However, if the price falls, you will also lose more money really fast.
For example: if instead of increasing by 20%, the price falls by 10%, you won't lose $ 10, but $ 20, because of the leverage. Therefore, when using leverage it is very important to know about Take Profit and Stop Loss.
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 program your broker to close your operation when it reaches $ 120. That way, you make sure you won't change your mind and decide to keep waiting in case it keeps going up, which could be a mistake since the price could go down again.
Stop Loss is even more important, especially when trading with leverage, since a small loss could have a significant impact on your wallet. Consider that your broker will recommend a limit for Stop Loss, but you should place it closer to current price than the platform suggests.