Gamestop: A pause on Wall Street?
A layman’s perspective
On January 2021, GameStop, a company in death throes, found itself thrust into the limelight thanks to a fringe subreddit group called ‘WallStreetBets.’
Let’s go back to the beginning a bit and talk about bears.
A bear is a type of investor who borrows shares from a broker at the current price, sells them, and repurchases them at a lower price. They then return these stocks to the broker.
For example, say an investor borrows a stock, and its current value is $20. She thinks the value will fall, so she immediately sells the stock for $20. To return the stock to the lender, she waits a few days for the price to decrease. When it has reduced to say $10, she repurchases it and returns it to the broker, making a $10 profit, and that is called ‘shorting a stock.’ However, if the stock increases to $30, she loses $10. Transactions of this nature carry a large amount of risk because there is no upper ceiling to the amount of loss if the price keeps rising.
Why would someone lend their shares?
Fund managers and large investors typically hold many funds and large quantities of these funds. By lending shares, they can earn some revenue from their shares, otherwise idly sitting in their portfolio. In other words, they have nothing to lose.
Coming to GameStop now, the stock increased from around $3 to $325 in 6 months, almost an 8000% increase. In 2021, the stock was $145.60 on January 26th and increased to $345 on January 27th. It peaked on January 28th at $469.42.
How did this happen?
A short squeeze happens when a person hoards the stocks if they noticed the shorting taking place on a nearly collapsing company like GameStop. When the shorters have to return their shares, there may not be enough shares left, which means that the demand is high, and the supply is low, which drives up the price. This was the scenario that played out when members of ‘WallStreetBets’ began to buy GameStop shares as a group.
People realized that GameStop’s stocks were being shorted, and for a while, it was the most-shorted stock on the U.S. markets. The idea was that if enough people bought the shares, the value would increase enough to cause a short squeeze. In two weeks, the GameStop stock rose from $20 to $350, and hedge funds lost a lot of money.
After this, Robinhood, a trading app, stopped all users from buying more Gamestop and other shorted stocks. There was a severe backlash, with people saying this was market manipulation and that Robinhood was preventing people from trading in a free market to protect the Wall Street hedge funds. One of the hedge funds that was involved in the shorting of GameStop was Melvin Capital. Several questions arose about Robinhood’s decision to stop trading stocks and whether it was because of Citadel’s influence, who pays Robinhood for user activity data.
One positive outcome from the whole situation was that ordinary people benefited from the wealthy companies. The name of the company ‘Robinhood’ comes from its mission to provide everyone with access to the financial markets, not just the wealthy.’ Still, the fact that it prevented the trading of stocks is now questionable. It appears as though it is selecting stocks that people are allowed to or not allowed to trade in a free market that comes off as market manipulation. It is fascinating how a group of users on Reddit came together to take-down several hedge funds while carving out enormous profits for themselves.
Not everyone is happy with these large companies and believe the system is rigged to benefit the rich. Some of these non-institutional traders will likely lose a lot of money if this entire thing blows up, but it is debatable if any of these people care as they see it as sticking it to the big guy.
The power of the internet has grown exponentially over the years. When something similar took place in the 90s, with the Harshad Mehta scandal in India, the impact was limited to the regular investment ecosystem and hardly affected the common man. Now, the GameStop phenomenon has global awareness, from comedians talking about it to people like me writing about it, and most importantly, the creative Twitter memes like these:
https://twitter.com/JUSTINtime4aLAF/status/1354805805296480263?s=20
https://twitter.com/myunclesmemes/status/1355467221124964352?s=20
