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The Covid-19 Pandemic has inflicted a crippling blow to the already suffering GameStop. Thanks to online gaming and the internet, the once tremendously popular video game retailer is planning to shut down over 450 stores in 2021. And as surprising as it may sound, GameStop has still managed to become one of the most sought-after stocks in less than a year.
This almost cult-like status of GameStop can be traced back to September last year when the founder of Chewy, an online pet food company, invested heavily in GameStop and purchased a 13% stake in the company.
What Happened With GameStop?
In January this year, Cohen and his two associated became the board members of the Company. Soon after, the company’s stock price started to surge as an army of small individual investors quickly purchased the company’s shares via various trading apps especially Robinhood. They didn’t want to miss out on this almost perfect buying opportunity.
Wall Street decided to take advantage of this in another way. This is their chance to short-sell the company’s stock. In fact, Wall Street Hedge funds had expected to gain massively by short-selling the stock.
However, a subreddit community that goes by the name r/WallStreetBets came to know about this and implemented something called “short squeeze”. For the uninitiated, a “short squeeze” is a practice of buying stock to boost its price for the short term. That’s what they did with GameStop’s stock.
So, the hedge funds that hoped to make massive profits were looking at huge losses instead. WallStreetBets, most people believed, was responsible for this mayhem.
What Exactly Is Short-Selling?
Short selling is a practice where an individual or a fund borrows a stock and sells it right away. Investors usually invest in such stocks when they think that the price has already hit the rock bottom and from here it will only go up. So, they purchase the stock and sell it immediately to the broker at a profit. The price difference could go as high as millions of dollars.
Why Short-Selling Failed With GameStop?
There can be several reasons why short-selling didn’t work for the GameStop stock. First, the prices may have gone up. This usually happens whenever a stock experiences a significant activity. In this case, the hedge funds had to buy back the company’s shares (to prevent bigger losses) to give them back to the brokers. This might have resulted in increased prices.
Secondly, and probably the most important one was the r/WallStreetBets community on Reddit. The subredditors have followed a unique approach by implementing the methods of crowdsourcing in the stock market.
As a result, they banded together and started buying as many of GameStop’s shares as possible for them. This has boosted the price of stock even further. This has made hedge funds nervous and they started selling their GameStop stock in large numbers, leading to the rise in stock price even more.
Furthermore, Elon Musk, the Tesla founder also seemed to promote the movement when he tweeted “GameStonk” with a link to the Reddit community.
Who Won And Lost With GameStop?
Reddit traders: The video game chain, which was going through heavy losses, saw a sudden surge in its shares – from a meager $20 per share in December to almost $350 in January 2021. The shares are trading at $200, as of March 2021, The sudden jump can be attributed to the hoards of individual investors, sharing tips on the web and social media, that grabbed the opportunity to take advantage of short-selling by the Wall Street hedge funds.
Hedge funds had bet on the falling prices of GameStop’s shares. Consequently, they had to buy more stock to cover up the losses. The news spread like wildfire globally and fuelled the stock activity in countries like Brazil, Malaysia, and the UK.
Amateur day traders are full of enthusiasm bragging about the performance of their bets and how they have made millions of dollars from tiny amounts That said, most of these incredulous gains are only on paper and could even result in significant losses if the price drops.
Wall Street: Some of the biggest names in Hedge funds have reportedly experienced losses due to this stock buying frenzy. These include Point72, SAC Capital, DI Capital, and Maplelane Capital.
On the other hand, firms like Blackrock and Fidelity have seen a considerable rise in their holdings’ value. The surged stock prices also helped Ryan Cohen who made a big investment in GameStop recently. AMC has sold its shares and raised over $300m in January this year.
The windfall has created opportunities for some other companies as well. For instance, Silver Lake Group, a private equity firm, made hundreds of millions of dollars by converting its bonds to shares right after the prices soared.
Robinhood: Robinhood is a Silicon Valley startup that has been accused of attracting amateur Investors and alluring them to make quick money with risky strategies. In a recent development, Robinhood has limited the purchase of GameStop stocks due to market risk and volatility.
No one really knows where it goes from here. The stock price is still rising. NYSE was forced to stop trading in GameStop several times because of excessive trading.
Frequently Asked Questions:
- What is Hedge Fund?
A hedge fund is essentially an investment partnership that uses proprietary strategies to invest in a wide variety of products.
- What Is Short Squeeze?
A short squeeze happens when an asset, such as a stock, sees a sudden surge in its value. In such cases, traders who have bet that the stock price would drop have to buy back the stock in an attempt to forestall bigger losses.