What does a fledgling game retailer, wall street head honchos and a group of Redditors ‘who want to stick it to the man’ so to speak have in common? Well, if you have been keeping up with the news, you may have heard about GameStop and how its stock price rose - thanks to a dedicated group of Redditor’s. But how did this all start?
What is GameStop?
Based in Grapevine, Texas in the United States, GameStop is a brick-and-mortar retailer that specialises in the buying, selling and trading of games and game devices. Before blowing up everyone’s Twitter feeds over the last few days, GameStop was struggling and has been since 2016.
Stiff competition from online marketplaces and games slowly shifting over to the digital distribution model made many physical retailers pack up their bags and leave. GameStop is probably one of the last of its kind left.
The retailer also made news for all the wrong reasons. In 2017, it came under fire for its Circle of Life policy. Circle of Life is a rating system that GameStop employees adhere to, which requires them to convince customers to buy games, trade old ones and ensure that the money that customers get back goes towards buying more pre-owned games. Employees were given scores to represent how they fared and anyone with low scores would likely find their jobs on the line.
After the controversy blew up online, GameStop changed its Circle of Life system to be more accommodating towards employees.
The outlet also came under fire for its COVID-19 response, preferring to keep its shop open in the face of a citywide stay-at-home order by flagging itself as ‘essential business’ that provided products essential to enhancing the new ‘remote work’ paradigm everyone had suddenly found themselves in.
In the face of stiff competition, the company’s stock has been nosediving since 2016. So, how are the stocks of a failing company now soaring?
Wallstreetbets vs Wall Street Traders
Before we understand what is really happening with GameStop’s stock, it would probably help to familiarise ourselves with some lingo that you are going to be hearing a lot from this point on.
‘Day trading’ means buying and selling stock of a property multiple times during the day. The goal here is to make small incremental profits that stack up as you trade. This, as you might have guessed, is risky and is used by a lot of scam artists to blindside amateur traders.
‘Short selling’ is the process of betting on a stock that you know is going to fall. For example – Company A’s stock is trading at Rs 250 and you know that it is going to fall to Rs 150. You ask your broker to lend you a share worth Rs 250 and then immediately sell it on the market for the same price. After a while, the price drops to Rs 150 and now you buy that share at a reduced cost. Now, you return that share to the broker at the newly lowered cost. Since you sold the first share at Rs 250 and bought another share for only Rs 150 before returning to the broker, you pocket Rs 100 as profit.
‘Hedge funds’ are a small group of investors usually presided over by a money manager. This system is designed to make a profit, either by ‘short-selling’ heavily on a failing stock or using another exploit that is mutually agreed upon by all the investors in the programme.
With that out of the way, what exactly happened to GameStop’s stock? In a word – Reddit.
As GameStop’s stock was sinking faster than the Titanic, someone on Reddit noticed a Hedge Fund was heavily ‘short-selling’ the stock. Then a group of amateur day traders at the r/wallstreetbets thread decided to get involved and that is when it all started.
This group of traders managed to convince other people on the thread to join forces and buy as much GameStop stock as possible, making the share prices go up astronomically. This counterattack eventually saw the Hedge Fund begin to lose massive amounts of money to the point where they closed, unable to keep themselves afloat.
Here is the interesting thing though, when this was discovered, the big honchos over at Wall Street cried foul and demanded this practice be deemed illegal despite unashamedly having indulged in the same for many, many years. This, in turn, has now prompted a blow-up all over social media with people accusing the rich of manipulating the stock market to keep the others out.
This firestorm has now reached a point where the investors who shorted the shares betting on the GameStop stock to fall, now find themselves in a situation where they will end up owing a massive amount of money instead, some to the tune of billions.
Fearing a stock crash, many popular trading apps such as Robinhood stopped purchases of GameStop stock on their platforms, only allowing the stock to be sold. This blatant manipulation to protect the hedge funds got a lot of people talking including congressional representatives.
This noise has even reached the White House with the US President’s Office putting out a statement saying it was monitoring the situation.