GameStop [Photograph] - (‘Shelby Township, Michigan, USA - November 2, 2011’)
The past few days a horde of individual traders pushed #GameStop stocks to $483 a share. Last year the stock was only $2.57. How did this happen? Why such a big difference? Did GameStop do amazingly well that their stock price went up? The answer is a bit complicated.
If you aren't from the US, you may not know about company #GameStop. #GameStop is a company that sells physical copies of video games as well as game consoles. The pandemic hit them pretty hard as people aren't buying as many games or consoles as they don't have much disposable income. The company has also shut down a number of physical stores -- not a sign of a company doing very well.
Many investors bet on company stocks to devalue. This is called shorting. They borrow the stock from a broker, sell the stock at a higher price, then sell the stock back to the broker at the lower price while buying more shares at the lower price and pocketing the difference as profit. This is usually a smart bet for companies that aren't doing well (like #GameStop). [So What Exactly is Short Selling? An Explainer]
Shorters can also lose money. If the price goes up instead of down, they have to sell at a higher price and buy at an even higher price to return the stock to the broker.
An investment company called Melvin Capital Management shorted millions of dollars in #GameStop, betting that the price would go down. Last year, Redditors on the subreddit Wallstreetbets did an analysis on the #GameStop stock and found that it was undervalued. They also discovered that short-sellers shorted more shares than actually exist. This is normally not a problem as there is always a back and forth exchange, but this is where the Redditors come in. [Vice - Instagram]
The Redditors started buying up stock and holding onto it, pushing #GameStop's stock higher and higher and forcing the short sellers to sell the stock at great losses.
Melvin Capital Management announced an emergency infusion of $2.75 billion to cover the shorts and they closed their positions on Tuesday afternoon. Short sellers lost $5.05 billion these past few days. [Short Sellers Lose $5.05 Billion in Bet Against GameStop]
The popular trading application Robinhood (the platform that is the most popular with individual traders) stopped users from buying #GameStop stock to stop the short selling.
The US Congress has announced that they will have a hearing on the issue, to examine the recent activity around #GameStop stock and other impacted stocks with a focus on short-selling, online trading platforms gamification, and their systemic impact on our capital markets and retail investors." [the U.S. Congress to hold hearings on GameStop trading, state of stock markets]
Many people speculate that Robinhood stopped the trading to protect Wall Street Hedge Funds -- one from which they receive 40% of their revenue. [Robinhood Is Said To Get 40% Revenue From HFT Firms Like Citadel]
Argyris, I., 2021. Individual Traders vs Investment Firms - GameStop. https://www.breakdiving.io/. Available at: https://www.breakdiving.io/posts/7837 [Accessed February 12, 2021].