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GameStop: An Explanation

GameStop%3A+An+Explanation

Wall Street is booming at the start of 2021;  people are rushing to make a quick buck from business failures due to COVID. One of the hottest companies right now that people are buying stocks in is GameStop. The rise of the company’s shares are driving an immense amount of people to invest and make some good money fast. But why is this happening? Why would someone invest in a company that may very well go bankrupt? How do people make money off of this? And how are people losing millions, and some, billions of dollars because of this recent phenomenon? 

Firstly, we need to talk about what short selling is. This is insanely important to the phenomenon because it has to do with the stock markets’ ongoing battle between long-term investors versus the short-sellers. Basically, short selling is when an investor or firm “borrows” shares from a brokerage- effectively betting against a company who they believe is overvalued and promising to pay them back but for a smaller price to gain profit. This type of betting, however, comes along with major risks, because if the market share rises then the short seller loses money and has to pay back the shares borrowed plus interest, which can cause many big-time hedge funds, like in this GameStop rush, to lose millions of dollars. 

Starting about a year ago, on April 3, 2020, the price of a single share at GameStop reached an all-time low of $2.83 per share. The company was basically doomed until they came out with a new plan to close most retail stores and move inventory online so it’s more accessible to the common consumer because of the pandemic.  Therefore, a bunch of wealthy hedge funds banked that the company would be overvalued at 2.83, so they borrowed large amounts of shares from the brokerage betting on Gamestop’s downfall. They decided this would be a great idea because they know that no one will buy any retail games anymore because of COVID causing the company to collapse and lose millions of dollars, but making them much more money. 

Then suddenly, users on Reddit started talking about investing in Gamestop which turned into a social media storm of people investing in this company without any knowledge of what their money was doing. On January 13, the price per share shot up to $31.00; the day after it jumped to $40.00; then it jumped again on January 22 at $65.00, then finally the share price peaked at $400.00 on January 25, breaking the highest market cap in Wall Street’s history with over 139% of GameStops shares being borrowed or sold short. This is what this is all about–all the wealthy hedge funders had to buy their shares for a much higher price after the short squeeze causing many to lose millions of dollars. 

After all of this happens and many rich people are losing millions, the brokerages put a freeze on any trades involved with GameStop. This was very controversial among many day traders. Many people believe that this act by the brokerages is a little fishy, claiming that it is legal for these companies to freeze the trades. However, the SEC is cracking down on some people for stock manipulation which may have attributed to the increase in stock prices. It’s like a battle between major corporations and daily day traders. 

In a recent interview on CNN, Jordan Belfort, otherwise known as the notorious ‘Wolf of Wallstreet’ had something to say on this media blow-up. Jordan quotes, “There’s a lot of money to be made and lost with all of these Reddit and other platforms pumping up the stock, it’s essentially a modified ‘pump and dump’. One thing to keep in mind is that, like always, the stock will inevitably go down because it’s not trading on any rational or fundamental value. Every time the market goes up, it gets a lot harder to drive the price up cause the market cap gets to the point where it’s not sustainable anymore to hold on to your cash”. 

In later days, smaller trading companies such as Robinhood came out with changes in how their system works. Many of these smaller trading sites say they are raising margin requirements on certain securities that will affect the number of people short selling in future blow-ups like this one. 

Was all this a worthy investment? The answer to this question would be a ‘yes’ if you invested early and sold at the right time. If you know the market well enough you would have made a good couple hundred dollars from this. However, you have to be careful with these kinds of blow-ups, because, in the end, you might lose thousands of dollars if you’re not careful enough and are a knowledgeable person on the market. 

 

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  • T

    terri sageMar 24, 2021 at 7:34 am

    This article helped me to understand hedge funds and short sales. The market intrigues me with all the new businesses and the ways investors can make money in the market.

    Reply
  • M

    Micah KalejsMar 23, 2021 at 9:10 am

    This is absolutely insane what is going on with Gamestop. If only I could’ve invested earlier lol. Great article by the way! 🙂

    Reply