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GameStop stock, Reddit and WallStreetBets: what you need to know

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Elon Musk got involved, and the White House is interested

GameStop, a brick-and-mortar video game retailer in the US, has gone from being at death’s door to a market cap of over US$23billion as of January 28 – all in a matter of days. And who knows what it’ll be valued at tomorrow.

The supposedly dying company hasn’t released a new blockbuster console, nor has it introduced a new service that’ll bring it into the digital age. But instead, GameStop has simply become the frontline of an epic David vs Goliath battle between institutional investors and a ragtag team of traders from Reddit – with some moral support from Elon Musk.

It’s not easy to explain what is going on with the GameStop shares, as is the volatile nature of the stock market, but here’s everything we know about the situation so far.

GameStop’s share price has skyrocketed over the past week, going from well under US$100 on January 21 to an eye-watering closing price of $347.51 on January 27. It later fell to $225 by February 1. However, stock price is not indicative of a company’s performance or financials – although it can be – but is instead driven by supply and demand for the specific shares.

Because of GameStop’s poor performance over the past decade, alongside the growing digitalisation of video games, huge institutional hedge funds have been short-selling the shares of GameStop. Short-selling, to make a long story short, is essentially betting that a specific stock will fall in value over time.

So why has it gone up so much over the past week? A group of investors, mostly from the sub-reddit page r/WallStreetBets, identified that some hedge funds (mainly one called Melvin Capital Management) have been holding rather large short-selling positions on GameStop. They then bought up all the available shares – there’s only a limited amount, believe it or not – which caused them to effectively control the shares available to the public and create artificial demand, causing the price to skyrocket.

This tweet from user @tashitsenkyap explains it quite clearly.

What’s not explained in the analogy is that, in theory, there’s no limit to what short-sellers could lose – as the price of a stock could go up forever.

And to make a chaotic situation even more ridiculous, the short-sellers had “shorted” more stocks of GameStop than were actually available to trade (yes, this can happen). And remember, the group of Redditors had bought up all the available stocks that were up for trading.

That means it’s harder for hedge funds to cut their losses and close out their positions – to stop betting against the stock – because the Redditors are not selling the stock they currently own.

Not exactly. The stock price of GameStop has been very slowly rising over the past couple of months, after financial news website TheStreet called the stock “one of the most heavily shorted stocks in the market” in September 2020 – although the amount it was rising at during those months was absolutely paltry compared to the numbers it’s doing now.

But according to Bloomberg, users on r/WallStreetBets had been toying with the idea of buying GameStop stocks since two years ago. The report also noted that more high-profile investors, such as Michael Burry of The Big Short fame, had bought the stock back then, seemingly signaling that the GameStop stock rally was an eventuality.

After its record breaking close on January 27, the price of GameStop stock has since cooled down to around $225 on February 1.

The price of GameStop shares closed at US$347.51 on January 27, which gave the stock a market cap of over $23billion. However, it subsequently dipped slightly in after hours trading and was down three per cent as of January 28 at 10am GMT.

In the days prior, it had closed at $147.98 on January 26, $76.97 on January 25 and $65.01 on January 24.

Not really…

A company’s stock price can be a reflection of its performance and investor sentiment – but GameStop’s last investor report, issued on January 11, showed that sales for the company were down around 3 per cent for the 2020 holiday season compared to 2019.

But it is worth noting that the market did respond positively to news that Ryan Cohen, co-founder and former CEO of e-commerce company Chewy, joined GameStop’s board of directors on January 11.

Melvin Capital Management closed out its short position on Tuesday (January 26) and took a huge loss in the process, according to a report from CNBC.

Although the hedge fund has not revealed the amount it has lost over the GameStop short, the report noted that the company had taken on close to $3billion from two investment banks in order to keep itself afloat. The hedge fund’s manager, Gabe Plotkin, also told CNBC that the company is not filing for bankruptcy.

Elon Musk, the CEO of electric car company Tesla, husband of Grimes and prolific Twitter user, joined the fray on Tuesday (January 26) with a one-word tweet, “Gamestonk!!”, alongside a link to the r/WallStreetBets page.

His tweet seemingly sent investors into (even more of) a frenzy. The day after his tweet, GameStop shares soared over 135 per cent from Tuesday’s close, ending at US$347.51 a share with a market cap of over $23billion.

Days after, Grimes shared “financial poetry” on the ongoing GameStop shares saga, tweeting: “In the vast ocean / My tear is a drop / My dollar a single photon / Of the light of GameStop”.

As of now, everything that’s happening seems to be perfectly within the rules of the stock market. Bloomberg columnist Matt Levine, who was previously a lawyer and investment banker, wrote that the situation “might be illegal in all sorts of ways, but it is not obviously illegal”.

“If the U.S. Securities and Exchange Commission were to go after WallStreetBets for this stuff they will be breaking new ground and going beyond their previous cases,” he added.

That being said, the White House has also noted that it is “aware” of the GameStop situation. On Tuesday, (January 27), press secretary Jen Psaki revealed that the economic team of the Biden administration, including newly confirmed Secretary Of Treasury Janet Yellen, are “monitoring the situation”.

“It’s a good reminder, though, that the stock market isn’t the only measure of the health of our economy,” she added.

However, on January 28, the Securities and Exchange Commission said it was working with fellow regulators to “assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants”. It’s currently unknown if any actions will be taken.

Well, the stock price of GameStop might reach a level so high that people eventually start selling it. And when that happens, the value of the share will more or less return to reflecting a company’s true worth. That projection, though, is based on regular investor behavior, and who knows what the r/WallStreetBets investors will do next.

These Redditor investors are also seemingly turning their attention to other stocks that might have also been shorted. Stock prices of movie theatre chain AMC, software company BlackBerry and retail franchise Bed Bath & Beyond have also seen unexpected and sudden rallies.

The Saga is also reportedly being turned into a movie. Film company MGM has apparently acquired a book proposal from New York Times best-selling author Ben Mezrich, titled The Antisocial Network, although nothing has been revealed specifically around Mezrich’s plot for the book.

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