The GameStop story - how a social media for nerds shook the entire Wall Street!

If you are active on social media, the story of GameStop isn’t something that you are ignorant of. There has been continuous buzz about the company and how a group of investors created havoc like situation for the big players in Wall Street. So, what exactly happened? How did rookie investor overpower the veterans? And what role did Reddit play in this mayhem?

Before delving into the incident there are few terms the readers must be enlighten. These includes key financial terms like day trading, short selling and hedge fund.

Day trading refers to purchase and sell stocks or vice versa, this can be done multiple times in a trading day. The main aim is to earn a small profit out of the price fluctuation.

Short selling is a form of day trading where the investor first sell a stock and then purchase it later before the end of the trading day. It is a way of profiting off the price of the stocks that one knows is going to fall.

Hedge funds are big institutions with a massive pool of investing funds that aim to earn profit by short selling on falling stocks.

What’s going on with GameStop?

GameStock the US chain of video game retail store, experienced a massive surge in its market value. GameStock was a dying and outdated company which was valued at a mere $3.25 per stock a year ago. It experienced almost 8000 per cent surge within six months. The value rose by over 1700 per cent since December and made outrageous high.

Why did GameStop’s stock start rising?

It all started in mid-2019 when a Reddit user made a huge investment in the company and posted it on Reddit’s Wall Street Bets forum. Amateur traders gathered at Reddit forum to share memes, commiserate over losses and share trade related tips and analysis. Initially, the post didn’t get any major attention however, the user kept tweeting about the retail store and his investment. His post finally received attention last week and many young traders went all guns blazing at the stock, that led to an unwanted increase in the prices of its shares.

The first major boost to the retail store share price came last September when Ryan Cohen, founder of the pet food company called Chewy, bought a 13 per cent share in the company. But the main reason behind this wild surge is that it was one of the heavily shorted stock on Wall Street. About 71.66 million GameStock shares have been shorted, worth $4.66 billion.

Other than GameStop, fundamentally weak companies like Blackberry and AMC entertainment experienced a northward surge in the share price. The share price rose by about 185 per cent and 862.5 per cent respectively.

Consequences of the rally

Short sellers in Wall Street lost about $23.6 billion on GameStop in this rally. Melvin Capital lost about 30 per cent of the $12.5 billion invested in shorted stocks. There were claims that the company has gone bankrupt.

To protect the hedge funds, trading apps like Robinhood stopped the purchase of GameStop at their platform. This move led to a massive backlash on the social media where the platform was accused for favouring the riches and attempt to manipulate the market.

Who does this affect?

The enormous level of losses suffered by the hedge funds don’t just affect them. If they are losing money they will have to dump enough shares to cover up for the losses. This might have an adverse impact on otherwise solid stocks. If the sell-off is massive, it can have a cascading effect and rise the losses of investors who never traded any share of GameStop.