It feels as if 2020 produced enough headlines for a decade. A global pandemic, mass protests, an emotionally charged election, and some dude named the “Tiger King” are just a few of the many stories that kept our interest. Yet, here it is the second month into 2021, and Gamestop is dominating the headlines.
Gamestop, which was once a place to buy a video game, became the topic of discussion at every dinner table, group text, and social media platform last week.
When we look at this developing story, we need to understand some basic elements of investing. When purchasing a stock you are taking a “long” position. It means you own the security with the expectation that the stock will rise in value.
The opposite is called a “short” position. In this instance, you are selling a stock you do not own, anticipating that the price of the stock will decrease in value. You can buy the stock back at a lower price and make a profit on the difference.
Think of this as two sides to a coin with the key aspect being in the “long” position where your losses are limited to your original purchase price because a stock can only go to zero. With the “short” position, theoretically, your losses are unlimited as stock prices have no ceiling.
Now, think of Gamestop. Throughout the course of the pandemic, many retailers have struggled. Lockdowns have accelerated the trend of consumers buying online. This caused many brick and mortar retailers to be left out.
Hedge funds took notice of this and shorted many of the companies who were struggling, betting they would lose out and go out of business. Gamestop was one of those companies. The more Gamestop’s stock prices fell, the more hedge funds profited.
Here’s where the story gets fascinating. Reddit, a popular online forum, realized that these big Wall Street hedge funds were betting big against Gamestop. Starting on Reddit and spilling out onto many different social media platforms, retail investors convinced others to band together and purchase Gamestop stock.
Within a week, the price started to increase from retail investors, purchasing. Shorts started buying the stock as well to close their positions and limit their losses.
The price went from $30/share to more than $468/share. At one point, while seeing swings of more than $100/day (see chart below), it was costing the big boys on Wall Street billions of dollars. This effectively caused what is known as a “Short Squeeze”.
Admittedly, I was not nearly as productive as I could have been last week as I was following this story which is far from over. Robinhood, a popular trading mobile app for retail investors, temporarily stopped its users from purchasing Gamestop at one point.
This caused a significant backlash and spawned not only conspiracy theories but class-action lawsuit(s) against the company. Politicians have called for government intervention and a possible hearing into the events that transpired.
I hope this article helped explain some of the movement and shed some light on what was really going on with Gamestop stock. We are sure to have additional information to share on this story as it continues to develop.
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Written by Kyle Cooper at FSG