You had probably never heard of the words' GameStop,' but in the last few days, it seems like it's the only thing you've been seeing all over the internet. Your friends have suddenly transformed into Jordan Belfort from The Wolf of Wall Street, but you have no idea what's happening.
Well, there's no need to sweat, because we're here to tell you exactly what's going on with the GameStop stocks. Before we jump into that, here's are a few preliminary things you should know.
If you're a gamer, then you must already know what GameStop is. It's one of the biggest American high street shops that sell games, consoles, and any electronic device you can think of. However, since the pandemic broke out, the business had been hit hard.
Most of its sales shifted to online, like many other retailers. The video game store had decided to close 450 stores this year because of the amount of money it was losing. But then something happened, and GameStop has now become one of the hottest stocks of the year.
What Happened with the Stocks?
The 37-year-old video game store chain has become the focus of both small investors and Wall Street. If you start from last year, in April when the closure of stores was announced, the company's shares could be bought for $3.25 only. This Tuesday however, the stocks soared by about 92% and reached $148 each by the end of the day.
This started a sort of rivalry between Wall Street and small investors. The Wall street professional bet that the prices would crash, in the hopes to ruin their bets, the small investors pumped up the price again.
This Has Happened Before with Other Companies
Last September, Ryan Cohen, who is the investor and founder for Chewy, an online pet food company, took a stake of 13% in the retailer and lobbied it to move its sales online. He did it so the business could become a serious rival to Amazon. In just a few days, the company's share prices began to rise because the small investors snapped up the cheap stocks using trading services like Robinhood and others.
While these people say an ideal opportunity to invest, Wall Street saw it as something else – a chance to 'short' to be exact. These professionals believed and betted that this ambitious effort against Amazon would fail miserably.
This is similar to what has happened with GameStop as well.
What is Shorting?
Shorting is an art of the stock market. It involves 'borrowing' a company's shares and selling them. The intention is to buy them back when the prices have fallen at a cheaper rate. It's common knowledge that many in Wall Street have made their fortunes this way. However, if the prices don't fall, the losses can be great.
Currently, 71.66 million shares of GameStop have been shorted. They're worth about $4.66 billion. The bets have cost investors more than $6.12 billion, and you know what? This includes a loss of $2.79 billion just on Monday.
The fact that Monday's stock gain of 145% increased GameStop's annual gains by more than 300% shows how a new trading trend is rising. Individual investors now have the power to outsize the entire stick market. This is something that we'd never seen before.
This trading party that continued till Tuesday has made GameStop one of the most actively traded stocks by customers in recent times. Its buying orders have outnumbered selling orders by 4 to 1.
What's a Short Squeeze?
To put it simply, a short squeeze is what's happened with GameStop. Its stock was heavily shorted, which forced sellers to get out of their bets when the price rose. However, in order to that, they have to purchase the stock. This makes the price go even higher, along with creating a feedback loop. This means that as short-sellers have decreased for GameStop, the small investors are urging one another to keep the momentum going.
How is Reddit Involved?
Yep, you read that right! Reddit is involved in this entire fiasco. There's a group called 'WallStreetBets,' where people have discussions on what's going to be the next big trade jump, what's going towards self-deprecation, and what have been some of the best winnings and losing bets.
This group is responsible for the rise in GameStop stock as they've been encouraging each other to keep buying the company's stocks to push it higher. One of the most interesting reasons why these small investors were so focused on GameStop is because it's hated by hedge fund managers and hedge fund billionaire and professionals on Wall Street.
You can think of it as a battle between the two entities, with one betting on the stock to fall by 'shorting' it and the other pushing it higher by buying it.
One of the users on Reddit said in an interview with the Guardian, "This is quite the experience for my first month in the stock market. Holding till infinity. We're literally more powerful than the big firms right now."
Do the Small Investors Really Believe in GameStop's Business?
This topic can be put up for debate. While for some, it really might be GameStop's business, but for others, it's about inflicting pain on the big financial firms. If you go through the group on Reddit, you'll see people talking about how the financial elite have benefitted from years of gains, but now it's time for others who have fallen behind all this while.
In an article by Chicago Tribune, one of the users talk about how it isn't about greed at all. "It's about taking back what's ours, what we've already paid for," he said after citing all the times "they" have been bailed out using taxpayer's dollars.
"This is for making us work on Thanksgiving night all the way through black Friday at 9.50 an hour," said another member of the group.
How is Elon Musk Involved?
That's a good question to ask! We all know the Tesla Boss loves to tweet. And what's incredible is that his tweets can make a huge difference in any situation. This time when he took to Twitter, he rattled the financial world.
All he read was tweeted the words, "Gamestonk!!" and the stock prices of GameStop soared even higher. Along with the words, he also posted a link to the Wall Street Bets Reddit forum. You know what, the members of this group refer to him as Papa Musk. LOL!
Which Other Companies Are Involved?
After this event with GameStop, investors have been looking for other companies to do the same with. Consequently, American Airlines, Blackberry, and other companies with downtrodden stocks have seen a surge in the price of their stocks.
What Does Wall Street Say About it?
Over the long run, a company's stock prices track with its profits. Professionals at Wall Street believe GameStop's earning still remain cloudy and because of that, they predict that the stock prices will go to $15 or less.
One of the biggest investors at Wall Street, Citron Research's founder Andrew Left had called the gaming company a 'failing mall-based retailer' earlier this month. He had posted a video on Twitter where he said that the stock would go down as low as $20. Citron and other big names have learned the lesson the hard way that herd investors can change the game entirely.
How Will This End?
No one knows for sure how this war will end. According to the New York Times, some analysts believe that this whole situation could eventually lead to a wider sell-off in the market. Hedge funds that are currently on the losing side of the trade could be forced to sell parts of their portfolio in order to make up for the losses they experience.
According to Steve Sosnick, who is the chief strategist at Interactive Brokers in Greenwich people could be forced to raise funds, which they'd have to do by selling their winners. "How does it end? Badly. Eventually, the bigger the balloon, the louder the pop. When does it end? I don't know," he said.
There, this should help you understand what really happened with the GameStop stocks. If you want to learn more about how the stock market works, then we suggest we watch some movies to educate ourselves. Black Monday, The Wolf of Wall Street, Trading Places, American Psycho, and The Big Short are some Hollywood hits that dig deep into the working of the stock market. You can binge-watch these movies and become an expert at trading stocks.
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