Should Stock Speculation be Reigned In?

In the past week there were a few anomalies in the stock market. Beside the “normal” increase in stock prices for a number of stocks after the inauguration of President Biden, there were a number of stocks shot up in prices that are out of the norm and shouldn’t have happened.

The 2 stocks that particular interesting are GameStop (ticker: GME) and AMC Entertainment (ticker: AMC). GameStop stock price shot up by almost 700% in a week time while AMC Entertainment went up by 430%.

GameStop stock price in a week
AMC Entertainment stock price in a week

I’m not here to trying to understand or find out the cause of the price increase. If I have to guess, there is a lot of speculating of the stocks and through social media they are a lot more buyers jump on the band wagon and start trading these 2 stocks. There were a lot of short sellers that artificially increased the stock price beyond their value.

There is nothing wrong for any stock price to go up or down. However, if we dig further on GameStop, it is bleeding badly since the beginning of the pandemic. On top of closing 300 stores permanently it is impossible for the company to be valued at its current price. A year ago GME stock price dropped to $2.57. As of today, it went all the way to $380.

The stock price of AMC Entertainment is also the same. The lowest price of its stock dropped to less than $2 and it went all they way to $20. AMC is especially hit hard by the pandemic as more and more people skip the theater and stay at home. It is unlikely we will see AMC to increase its business anytime soon. The company even warns that it may run out of cash early this year.

The problem with these two anomalies is because of a lot of speculation of investors who are gaming the market. There is nothing wrong in making money off the market, but there should be a limit. That’s where the regulators come in. There are many controls in place set by the regulators to ensure the market is viable and not being abused. All the licensed brokers and companies have surveillance in place to prevent abuse. The trading apps such as RobinHood and Trading212 are uncharted territories for the regulators.

These anomalies will definitely raise a lot of red flags with the US regulators. I can assure you that there will be a lot of investigations in the upcoming weeks and there will be regulation in place by the end of the year to prevent this from happening again.

When I told my son that it is wrong to speculate. He asked me a good question. How are the GameStop and AMC different from Tesla? Tesla is trading at its highest and that made Elon Musk the richest person in the worth. If you dig further in the balance sheet of Tesla, it has yet to make money and consider its stock price compare to its valuation, Tesla stock is way overpriced.

I guess the question is should the regulators reigned in investors from speculating on stocks? If yes, at what threshold without stifling the market? I work in Internal Audit function of one of the largest bank in the world and this will be interesting to see in the few months. And how the market will react if the regulators start clamping down on such behavior.

All I can say now is as always the stock prices for these two stocks will right themselves up according to the market. In other words, their prices will drop according to their value. If you bought these 2 stocks, I recommend that you sell them before you start losing money.

It is unfortunate that a few bad apples take advantage of the market and hurt the rests of us who are honest investors. Let me know what you think?


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