Introduction
Trading shares in GameStop dominated media headlines – not just financial news, but entertainment talk shows as well. There’s even been a congressional hearing in the US to scrutinize what exactly happened with GameStop. Well, depending on which version of the story you’ve heard, we’re sure it was pitched as a David vs Goliath event. We’re going to break down the peculiar situation that surrounded GameStop share trading.
GameStop Share Trading
GameStop is a brick and mortar American retailer of video games, consumer electronics and gaming merchandise. Its shares are listed on the New York Stock Exchange and NASDAQ. If you are wondering about the simplest way of understanding what the stock market is and how it works, typically, share trading happens on stock exchanges through intermediaries – stockbrokers.
Traders can either go long or short. Going long means that traders believe that the price of a stock will go up; hence, they buy the shares of that company when the price is low and sell when high. Shorting a stock happens when you believe that the price will fall. So, you sell the shares when the price is high, then buy them later at a lower price, pocketing the difference.
Reddit vs Hedge Funds
Brick and motor stores are rapidly getting edged out by online stores in the current digital age. So naturally, hedge funds shorted GameStop shares in billions of dollars. Going by the laws of supply and demand, when sellers dominate the market, the price gets pushed further down.
The hedge fund short sells would have gone unnoticed were it not for the coronavirus pandemic. During the lockdown, GameStop had a surge in its online sales in 2020 and surprisingly, its shares crossed $20 for the first time since September 2017. This is where Reddit users took notice – specifically the posters on the subReddit r/WallStreetBets. They especially noticed how other Redditors had made a significant return on their earlier investment in GameStop shares. This is also where the massive short positions by hedge funds became widely public.
As a form of protest, the Reddit community posts encouraged its members to buy and hold GameStop stocks. This was seen as a protest against the culture of Wall Street manipulating share prices through large blocks of shorts trades. This contagion caught on. The Redditors bought shares and encouraged the community members not to sell regardless of the price. As is with any contagion, a handful of traders grew into a legion of enthusiastic buyers pitted against a few short sellers. Naturally, when demand rises, so does the price. Between January 1, 2021, and January 28, 2021, GameStop shares gained almost 2800%.
GameStop Trading Halt
With the astronomical urge in the price of GameStop, several hedge funds that had short positions were squeezed out and incurred losses in billions of dollars. This happens because the short sellers now have to repurchase the shares at a much higher price. Wall Street cried foul and claimed that this was blatant market manipulation. However, the jury is still out on the legality of whether the action of the Redditors amounted to market manipulation.
At the centre of this controversy was Robinhood, an online brokerage company that gained popularity among day traders since it did not charge a fee for transactions. Robinhood announced that it would temporarily halt buying GameStop shares among other stocks whose buying had been inflated by Redditors. The brokerage’s management claimed that it halted the trading to ensure risk management and comply with deposit requirements. However, this manoeuvre created downward pressure on GameStop’s share price. After Robinhood halted trading, GameStop’s share price plunged from highs of $469 to below $130 in less than three hours.
There are two crucial things to understand here. The first is to be aware that retail investors like us are capable of pumping the price of a stock, just like industrial investors. This impossibility was made possible by different social media forums. That being said, you should know when to enter the market and when to exit. Trading the news and taking advantage of the market movements is cool, but being a disciplined investor, we must ensure to check the fundamentals of the stock before taking any investment decisions. Cheers!
