"It's not about the money. It's about sending a message." THE GAMESTOP SAGA

GameStop, a brick and mortar video game retail store headquartered in the US sent shockwaves across Wall Street in the beginning of this year! The stock went from as low as $19 on Jan 12, 2021 to whopping $347 on Jan 27, 2021!

(Source: Bloomberg)


A retail video game store with declining sales became the hot shot topic across the world. A story is to follow, let's find out!


BACKGROUND


To tell you guys very briefly, GameStop is the largest US retailer selling video games and PC entertainment software including the new and used video game equipment. The retailer has close to 2000 stores across geographies. The company has made billions through video game selling and is currently trading at $194.49 on the New York Stock Exchange, while I am writing this blog.

The company hasn't been much profitable over the years since and the sales revenue of the company has seen a steep decline after 2010, since we all know how people switched to downloading games online rather than buying them from a brick and mortar store.

(Source: Macro Trends)



MANIA: THESTOCKWAR

(Source: BBC)


On the stock market, you can buy shares in a company and it can go up and down depending upon the demand of the shares. In a perfect world, you hope to buy shares at a low price and sell them when the price hits high, so that you collect a profit.

But people can also make money by betting if the share price of the company is going down. This is called shorting the stocks and this is where GameStop Saga comes into play, because it played a role in what happened with their shares.

Let me explain to you what happened.

Say you own a share of an orange tree, one orange, and you are happy to lend it to me in exchange for some commission or interest.

The value of this orange in the market is $20. But I think it's going to go down in a few days. So what I will do is immediately sell the orange at $20 and make $20, which is lovely but I still actually owe you that orange.

So, in a few days time when the price is fallen to $10, I buy the orange back at $10 and give it back to you with some interest, and still make a lot of money for myself.

Though there is usually a third party broker involved in this but this is the basic principle.

Multi-million dollar investment companies known as hedge funds can do this at scales and still make a profit from even a small drop, doesn't have to be a big difference like I explained it to you in the example. They can do this by selling shares in large volumes at once which can push the price of the shares down, to their benefit.

But, if the price of the shares go up after they have sold them, then they are still on the hook for those shares. They still owe it to someone and have to return it to them. So, they maybe forced to buy them back at a higher price and can stand to loose a lottt of money.

That's what happened with GameStop.

People on the Reddit message board Wall Street Bets had noticed something about GameStop. They saw that hedge funds were betting against GameStop in a big way, shorting more shares than even exist????

Well, say I have borrowed your orange and sold it to somebody else and that person lends that orange to someone else who also sells it.

Now, two of us are on the hook for an orange.

You might have got away with it, but with Wall Street Bets saw the opportunity to buy GameStop shares, hoping it would push the price up and totally mess up the plan up for the the hedge funds.

And it worked. Now, there was more demand for the shares than supply and the hedge funds were forced to buy their shares back at large prices, losing billions.

Along the way, some users of the Reddit made a fair bit of money for themselves too.

Some of the platforms and apps like Robinhood in the US that lets you buy and sell shares intervened and stopping people from buying GameStop shares which really angered a lot of the investors who said Robinhood was interfering in the open market and protecting hedge funds.

For it's part, Robinhood said it had limited trading to protect investors and it had to comply with regulations. It has since allowed some trading of GameStop shares. Robinhood interfering in the trading is the biggest example of market manipulation.

Well, as it goes with any investment, the price can come staggering down and people who bought GameStop shares at a high price could lose money.

But for many of them, "it was not about making money in the first place. It was about sending a message".

2,366 views1 comment