GameStop, a famous video game retailer, is all over the news right now. Their stock price has increased by a startling amount in a very short span of time, and its involved everything from Reddit to Elon Musk and Joe Biden. Here’s what happened.
GameStop is a company that sells physical copies of video games, and is currently the most highly traded asset in the United States. This happened because a bunch of Redditors in the r/WallStreetBets subreddit purchased huge numbers of GameStop stock at low prices.
Then, they kept buying more as the prices rose, held it, and are now forcing something known as a ‘short squeeze’ that is driving the price up.
This was in response to several giant hedge funds ‘shorting’ GameStop. ‘Shorting’ is a bet that a company’s stock will become less valuable.
This is done when an investor sells shares of a stock that they do not own. Essentially, they sell shares of a stock at a high price in the belief that sometime later the price of that stock will go down. They will then be able to buy the stock at the lower price to ‘cover’ their shorts, ‘closing’ the deal and keeping the profit which is the difference between the price they sold at and bought at. A good example of this is in the tweet below.
This has resulted in several giant hedge funds that had bet many millions of dollars that GameStop would fail, losing massive amounts of money.
These rogue redditors are led by a person going by the handle ‘DeepFuckingValue’. These guys have since been holding their stocks and asking each other not to sell. It has reached such a fever pitch, even US President Joe Biden’s team is monitoring the situation.
Since then, shares of GameStop Corp jumped by over 1600% to close at $345, taking its market cap to $24 billion. On January 12, the share of GameStop closed at under $20 per share. In a matter of 10 trading sessions, the stock has jumped by over 15 times.
Companies like Melvin Capital Management and Citron Research shorted millions of dollars in GameStop stock thinking it would fail and its stocks would go down. This has resulted in them suffering huge losses, though many on Reddit are hailing it as a revolution of sorts, since these companies often destroy small or failing businesses by shorting them early on. Elon Musk even tweeted a link to the page that started it all.
As the news has spread, so have the incredulous reactions online.
The entire issue has massively destabilised the stock market, and Wall Street has been caught completely off guard. Such huge share price moves cannot be explained by fundamental news or traditional valuation metrics, as they are fuelled by social media platforms.