New Delhi: You may not be one to follow the stock market or do stock trading, but the name GameStop could still be familiar given the frenzy it kicked up this past week.
This is because the US chain of video game retail stores, which was valued at a mere $3.25 per stock just a year ago, saw its stock price rocket by almost 8,000 per cent within six months.
On 26 January this year, the stock closed at $145.60, then increased to $345.00 the next day, peaking at $469.42 on 28 January. GameStop closed at $193.60 on the New York Stock Exchange on 29 January 2021.
So, how did a company with a doomed, outdated business model, become the most talked about stock?
The answer is r/wallstreetbets, a group of retail investors on an internet forum called Reddit who raised the stock price by 1,700 per cent.
ThePrint explains how GameStop’s fortunes turned and why the company even drew the attention of these investors.
Also read: GameStop mania spreads to glove makers in Asia
Reddit users vs billion dollar hedge funds
At the centre of this stock trading frenzy is a battle between amateur investors and multi-billion dollar hedge funds.
But before delving into why Reddit users suddenly took an interest in GameStock, here’s a quick reckoner of key terms such as day trading, short selling and hedge funds.
Day trading refers to buying and selling stocks of a property multiple times during the day. By day trading, one aims to make small profits that add up as they trade. Day trading is often used to blindside amateur traders.
Short selling is a way of profiting off the price of an asset which is falling. It is the process of betting on a stock that one knows is going to fall.
Hedge funds are a group of investors that are supervised by a money manager. These hedge funds aim to make profits by short selling on failing stocks. A big hedge fund has a pool of investment money that gives the investor the bandwidth to invest aggressively and make complex investments for bigger payouts.
Over the years, GameStop’s stock had been falling. Reddit users noticed hedge funds were heavily short selling the stock, particularly the $13 billion hedge fund Melvin Capital.
In mid-2019, a Reddit user (Roaring Kitty) posted a picture showing a $53,000 investment in GameStop. Though the post didn’t get any attention then, the user frequently tweeted about the retail store and the investment. Finally, last week, it caught the attention of many young online traders. This led to the share prices increasing to unwarranted levels.
Short sellers lost an estimated $23.6 billion on GameStop in this rally. Melvin Capital lost 30 per cent of the $12.5 billion it invested in managing shorted stocks. While posts on social media claimed the fund had gone bankrupt, the company’s spokesperson denied the claims.
After hedge funds lost money, Wall Street demanded that short selling be made illegal even though it’s a practice commonly used by everyone. In order to avoid a stock crash, trading apps like Robinhood stopped the purchase of GameStop on their platform.
This led to a massive backlash on social media where “the rich” were accused of manipulating the stock market in a way that kept others out. Several Congress members also cried foul.
This is beyond absurd. @FSCDems need to have a hearing on Robinhood's market manipulation. They're blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who've used the stock market as a casino for decades. https://t.co/CGkJxVfzkv
— Rashida Tlaib (@RashidaTlaib) January 28, 2021
People on Wall Street only care about the rules when they're the ones getting hurt.
It's time for SEC and Congress to make the economy work for everyone.
As Incoming Chairman of the @SenateBanking Committee, I will be holding a hearing on the current state of the stock market. https://t.co/V9Hzp26jRT
— Sherrod Brown (@SenSherrodBrown) January 28, 2021
And it turns out @RobinhoodApp is the biggest frauds of them all. “Democratizing finance for all” except when we manipulate the market cause too many ordinary people are getting rich pic.twitter.com/Xcvs4CdEmr
— Dave Portnoy (@stoolpresidente) January 28, 2021
The event prompted the White House to look into the matter as well.
Why the interest in GameStop?
The first boost to GameStop’s share price came in September when Ryan Cohen, investor and founder of the pet food called Chewy, bought a 13 per cent share in the company and started lobbying for it to go digital.
But the main reason behind the interest in the company is because it was the most heavily shorted stock on Wall Street. About 71.66 million GameStop shares have been shorted, worth about $4.66 billion.
This is where the very popular ‘wallstreetbets’ came into the picture.
Endorsed by Tesla co-founder Elon Musk, wallstreetbets is actually a subreddit, a specialised Reddit forum in which retail investors were taking a particular interest in investing in companies that have the most unfavourable opinion on Wall Street — the ones that are heavily shorted.
Other than GameStop, investors on this subreddit have driven up share prices of many shorted stocks, including BlackBerry, which advanced 185 per cent this year. AMC entertainment holdings, a theatre chain, has also risen 862.5 per cent this year to date.
How short selling changes the game
Shorting a stock essentially means betting against a stocks future performance. If it performs badly, the investor earns good profit and vice versa.
It is done through short options, which allows people to wager if the stock will rise or fall. Shorting is mostly done by hedge fund investment companies since an individual retailer typically doesn’t invest in such high risk equities.
Shorting is very high risk as the investment amounts to infinite liability. For instance, if a company’s stock is trading at Rs 350 and one expects it to fall to Rs 250, a stock broker could sell it on the market before the price drop. Now, once the stock price drops to Rs 250, the broker buys it back at the reduced cost. Since, the share was initially sold at Rs 350 and later bought for Rs 250, a profit of Rs 100 has been made.
The safety net investors have against these losses is the option to buy the stocks they shorted at a slightly higher price to limit their losses, which is what happened in the case of GameStop as well.
Worth less than $5 billion just a week ago, GameStop saw its stock price surge 400 per cent price in the week. The company’s value quintupled since last Friday, wiping out $11 billion in market cap, according to Bloomberg.
Indians cashing in too
Indian traders weren’t far behind in cashing in on this frenzy. GameStop was among the five most traded over the past week on Stockal, a platform for Indian retail investors to trade US securities, and accounted for 15 per cent of all trade on the platform.
It is estimated that the Indian retail bet on GameStop stocks is at Rs 60 crore to Rs 65 crore since Monday.
This includes Ujjwal Singhania, son of Sunil Singhania (a Dalal Street veteran). Ujjwal bought GameStop shares at $10 and has now made a 3,450 per cent return. He also bought AMC entertainment shares at $2, which are trading at $19.90 right now.
Another retail investor was quoted as saying he made a 150 per cent return on his $1,000 investment in the game retailer earlier this week.
Also read: Even Indian retail investors are playing with GameStop, US videogame stock that’s gone wild