GameStop, a struggling chain of video game stores with an outdated business model became the talk of the town when its stock price rose by nearly 1900%. The share price of GameStop increased from $17 in the beginning of the year to $300 by January 26. This increase seems weird considering the company wasn’t performing very well and the stock price was predicted to keep falling.
Nobody really goes to video game retailers anymore because people prefer downloading games rather than buying a hard copy, and the pandemic didn’t help the situations of retailers like GameStop. Such a loss of sales normally leads to a fall in the stock price. This made hedge fund managers interested in “shorting” this stock, hoping that the price would fall further. “Shorting” is the process of borrowing the shares first, selling the stocks at the current stock price and then purchasing it back when the price is lower, hence, making a profit of the price difference between the initial market price and the fallen price. Basically, hoping that the company would fail.
Melvin Capital and Citron Research Hedge Funds were planning on shorting the GameStop stock by selling the stock when the price was $15 and purchasing it back when the price drops because of the mediocre performance of the company.
What the hedge fund managers never expected was the involvement of a group of people on the Reddit website. A reddit community by the name of “WallStreetBets” was pointed out by experts as the driving force in the price surge. WallStreetBets also known as WSB is a discussion thread where people discuss the stock market and option trading. When these redditors noticed that hedge fund managers were shorting GameStop they decided to buy GameStop shares. As more people bought the stocks, the demand for the stock increased, and along with it the price, and this caused the short sellers to go for a “Short Squeeze”. A Short Squeeze is the term used when the short sellers who are expecting a stock to fall, rush to buy back the shares as the price of the said stock increases in order to minimize their losses. This boosted the price even more. This chain reaction eventually led to the stock price increasing to almost $380 and GameStop became one of the most traded stocks by Friday, January 27.
Melvin Capital, a well-established hedge fund, dealt with massive losses and had to take on $2.7 billion cash infusion to keep afloat, while the redditors boasted of a seven-figure profit.
This reddit phenomenon is not limited to only GameStop stocks and has started spreading to UK and one of UK’s most shorted stocks, Pearson and Cineworld, saw a significant price surge. Elon Musk has also been linked to this frenzy when he tweeted “Gamestonks” and linked to the reddit forum, the price then increased by about 150 % although there have been reports that this rise could have been a pure coincidence.
Reddit cofounder Alexis Ohanian said on twitter,
the GameStop squeeze is "the public doing what they feel has been done to them by institutions."
The impact on the market itself might be bigger and this just might have changed the way the market operates. This is the first time a group of amateur investors successfully took on hedge funds. More and more investors might follow each other into such big trades and they could act as a check on larger forces like hedge funds.
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