What’s All the Fuss about GameStop and Who Are Reacting?
Year 2020 was a period of uncertainty, which has extended to year 2021 as weird things happen in both politics and business it’s hard to guess what’s next. Trump is out but a new political loony by the name of Marjorie Taylor Green is sowing the seeds of divisiveness with her crazy conspiracy theories. So much for Green, but let’s just look at what happened to GameStop instead. Not even the owners of the company knew what was coming.
The GameStop bombshell sent many hedge fund managers reeling, not expecting that an already debilitating games retail store could still attain market capitalization way beyond its market worth. In August 2019, the Texas-based video game retail company GameStop was only worth $300 million. Today, things happened in the stock market that enabled the retail company to reach a market capital of almost $20 billion.
Background Info about GameStop
GameStop is neither a games developer or a gaming technology innovator. It’s just a big walk-in store where teenagers used to go to buy the latest in video game releases. In the last two years, GameStop was seen as one of the many dying retail businesses, since gaming platforms can simply sell their new games online and deliver their products to customers by way of downloads.
However, something weird happened because GameStop shares started selling continuously in recent months. So much so that the retail company’s capitalization increased by 3,000%,
Who Was Affected by GameStop’s Phenomenal Growth?
Conventional investors usually buy stocks at cheap prices, which they keep and later sell in the future when the price per share increases. In order to optimize this strategy, they buy shares of companies that show a bright future; specifically with the likeliest potential to attract investors.
A group of stock traders known as short sellers do the opposite. They focus on the less popular shares of stock. However, they usually do so by borrowing and not buying the shares of stock from a big institutional investor in exchange for a small fee. It’s a win-win situation because the stock lender will be able to get some return from a stock that has not been performing well in the market.
The short sellers on the other hand sell the borrowed stocks at the current market price. Since it’s a non performing stock, they’ll wait until the price of the stock drops further so they can buy it back and return the shares to the investor.
Short sellers realize profits without the need to invest money. Selling the borrowed stock earlier at a higher price and subsequently buying them back for a lower price, allows them to gain from the transaction. Whatever difference between the selling and buying transactions is theirs for the taking, since they only need to return the shares of stock to its original owner/investor.
Yet that didn’t happen for GameStop short sellers because instead of share prices dropping, prices started to rise; even skyrocketing instead of hitting rock bottom.The occurrence exposed the issues concerning short selling as there can be no profit if the stock price keeps rising.
Who is Behind GameStop’s Phenomenal Growth?
Understand that Reddit has a r/WallStreetBets forum, which is actually a chat room dedicated for stock market discussions. Apparently, there’s a group of anonymous investors who do not approve of short selling, to which discussions led to plans on how not to make the short selling technique work for short sellers.
The group chose to support GameStop, being one of the companies included among short sellers’ deathwatch list. The group of radical investors then started discussing buying shares of GameStop for about two years, promoting the company as an undervalued entity.
In April 2020, the group bought GameStop stocks together in order to spur increases in the price of the shares. The buying activities sent signals to fintech platforms that allowed small investors to pool their money and buy stocks that have been showing positive performance in the stock markets, with GameStop being the most prominent investment candidate.
The rest is history, because the radical group of investors were able to prove their point that short selling is not an ethical method of stock trading, since most short sellers are simply making money out of borrowed shares.