The shares of not-so-famous company AMTD Digital Inc. (NYSE:HKD) recorded a 19,550% growth over 15 days. The previous stock market record was held by GameStop Corp. (NYSE:GME), whose shares skyrocketed 2,200% over 11 days. The reason for the growth of the shares of both companies is the same – this was the consequence of the actions of Reddit users.

In this article, we will try to find out what has happened to AMTD Digital and GameStop shares, how Reddit users influence the stock market, and how high the chances are to buy some shares before they start skyrocketing.

What made GameStop shares grow abruptly?

GameStop is an American retailer selling game consoles, computer games, and gaming accessories. The phenomenal growth of its stock was caused by several simultaneous factors, and as long as the situation was developing slowly, there was enough time to notice the shares.

Note that no other company had previously demonstrated such impressive and sustainable growth, so nobody could possibly imagine the possibility of becoming a millionaire just by buying GameStop shares, even when they cost 10,000 USD.

The offline business of GameStop dragged the company down

The company's business was the basic reason for the growth of GameStop stock. Particularly, the fact that the company specialised solely in offline sales of gaming goods. And while other businesses were choosing to go online, GameStop was ignoring this transition.

Then the COVID-19 pandemic broke out, quarantine measures were introduced in most countries, with only online shops remaining available to consumers.

By then, the position of GameStop had become even worse. Acting in advance, investors kept dumping GameStop shares or playing short in them. As a result, the share price dropped from 40 USD to 2 USD, leading the company to the verge of bankruptcy.

The numerous short positions attracted the attention of traders

There were so many investors who wanted to make money on the decline that the situation was noticed by the users of the Reddit social medium who embarked on a purchasing frenzy, buying the shares of the company and spreading the information actively. Their goal was to provoke a short squeeze, i.e., to make sellers close their short positions.

The said shares had quite large trade volumes, and there were major investors in short positions. Huge amounts of money were spent to beat the bears and change the trend from descending to an ascending one. And in case of a failure, losses would have been significant. To decrease risks, Reddit users ran to a small trick: they started buying Call options for GameStop shares.

With a Call option, the investor only risks the paid bonus as the risk is fully assumed by the seller of the option. Any market player can be such, even a market maker. When the stock price starts going up, they hedge risks by buying the stocks.

Hence, private investors from Reddit did not need to make core changes in this situation; they only needed to shift the price several percent up to make option sellers hedge risks and factually become buyers of the shares.

And then a chain reaction began: those who were playing short, started closing positions to avoid risks, thereby becoming buyers of the shares. This resulted in multiple growing demands for the shares.

Why the short squeeze of GameStop is a unique phenomenon

A tough fight between bulls and bears had begun. Almost every market player had heard about the numerous short positions in the shares, major investors included. Those who wanted to make money on the situation were in abundance and had become too many. The stock was growing, but the growth did not answer to the real situation in the company; as a result, more and more bears were attracted.

In the end, the situation became absurd: the number of short positions exceeded the number of shares in the exchange; bears had no chance of closing their positions and got trapped with bulls smashing them.

The whole process lasted about four months. The most acute phase when the share price skyrocketed 2,200% lasted 11 days. The losses incurred by sellers, including hedge funds, amounted to billions of dollars.

Why the situation with AMTD Digital shares is different?

AMTD Digital is a fintech company from Hong Kong that offers investment and banking services worldwide. It owns the SpiderNet platform that provides maximum useful information about companies in the stock market.

Thanks to this instrument, investors can communicate and receive news about the latest tech trends, competitive environment, business development, etc. AMTD Digital with its SpiderNet platform is aiming at creating a digital ecosystem like a metaverse.

The company was founded in 2019, and over the first week of operations, it increased earnings more than ten times. The marginality of the business reached 88%. This means this is a modern, quickly developing company that offers an innovative product, unlike GameStop.

Moreover, on 15 July, AMTD Digital carried out an IPO on NYSE. As you know, an IPO implies a grace period, when even those who have bought shares on a Pre-IPO cannot sell them. This means that no one had time to take a short position, and a short squeeze could not possibly happen.

What made AMTD Digital shares grow?

The answer is in the liquidity of the shares. As long as the grace period was valid, only underwriters could sell the shares, and they only had 16 million shares. Meanwhile, after the GameStop events, more potential buyers were showing interest.

Each AMTD Digital underwriter was allowed to sell an option for buying 2.4 million shares for 7.8 USD each. Thereafter, they sold their shares at a market price that was much higher than 7.8 USD. This explained the daily trade volumes that did not exceed 2.4 million shares.

As you know, each underwriter is interested in the growth of quotes because the IPO is considered successful in this case. And they receive a profit and a reputational bonus.

As a result, private investors from Reddit communities began actively buying the shares, thereby breaking the supply and demand balance, which caused the growth of the quotes. There is a probability that some parties were able to study the supply volume of underwriters, and decided to play on this by spreading information in the social medium. In the end, the quotes of AMTD Digital rose from 13 USD to 2,555 USD.

One more proof of the low liquidity is a high spread. Currently, it exceeds 40 USD, while in times of active growth, it even exceeded 100 USD.

AMTD Digital share price spread*
AMTD Digital share price spread*

Could the share be found before active growth started?

Well, this opportunity did exist. Investors realised soon after the GameStop case that there was one more market power that could influence stock prices. There appeared services that tracked which shares are mentioned the most on the Reddit communities. In one such service, the shares of AMTD Digital were mentioned for the first time on 22 July, seven days after the IPO.

On 1 August, interest in the company even increased.

On 3 August, the shares of the company were mentioned more than any other shares.

How AMTD Digital reacted to the share price growth

The management of the company noted the volatility of their shares and specified that no major events had occurred in the company since the IPO that could explain the phenomenal rise of the shares, either in the business or operational activities.

Closing thoughts

The movements of AMTD Digital shares are a classical example of the Pump and Dump pattern. Post factum, we can conclude that since all the information about the company had been available, potential investors could have noticed its shares at a quite early stage.

However, in reality, the probability of noticing and buying such shares is extremely low. Most often, we hear about them once the movement has already started, and such times are characterised by high volatility and the uncertainty of further growth of the quotes. Therefore, this tells us that trading such stocks is considered a serious risk.

* — Past performance does not predict future returns

Material is prepared by

A trader since 2004, Eugene started actively investing on the US stock market in 2012. He now regularly publishes a variety of analytical articles about stocks on the RoboMarkets website and blog.