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What's happening with GameStop stocks, Wall Street and Reddit?

Shares of the games retailer have soared after Wall Street investors and hedge fund managers were outmanoeuvred by a Reddit community called WallStreetBets.

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What's happening with GameStop stocks and Reddit?
Rick Wilking REUTERS

Video game retailer GameStop has benefitted from an astonishing run of trading which has seen it confound Wall Street experts to become one of the hottest stocks of the year. Shares in the struggling company, which announced mass closures last year, have been bought en masse by members of an online community aimed at sticking it to the stockbrokers.

On Wednesday 27 January the price of GameStop stocks peaked above $370, more than quadrupling its price from the start of the week. What started as a group of upstart investors looking to beat the system has left some of the biggest names in finance scrambling to avoid a catastrophic defeat. But what has caused this meteoric rise and is it likely to last?

Struggling company shorted by Wall Street investors

Last summer the stock price for a single GameStop share was just $4 and experts were betting on it going lower. The 37-year-old ‘bricks and mortar’ retailer had a bleak outlook with the pandemic forcing them to close stores; increased competition and gamers increasing using online stores to purchase the latest games.

The stock was seen as so unlikely to succeed that it became one of the most 'shorted' on the market, meaning that investors and hedge fund managers were betting that the price would fall. When someone ‘shorts’ a stock they essentially sell shares of a stock that they do not own, based on the assumption that it will be worth less in the future than it is now.

When big hedge funds do this they can effectively push the price of the stock down themselves, sending out a signal that they expect the stock to fall and spreading a negative perception of the stock. But in this instance a group of Reddit users were determined to fight against the trend and ploughed their money into GameStop.

This was part of a wider trend of investment in ‘meme' stocks, which refers to companies who are seen as so outdated that they have become the subject of greater interest amongst online communities. There have also been notable price increases for stock of Nokia, Best Buy, Blackberry and AMC Theaters, all of which were heavily shorted by Wall Street investors.

GameStop finds unlikely support in Reddit community

The first step in GameStop’s incredible revival came in September 2019 when a Reddit user posted about investing a total of $53,000 into GameStop in previous months. At the time of his post the stock price had risen to 85 cents, and his investment was worth $113,000.

This was an impressive move but it was not until December 2020 that his escapade really began to spawn a larger movement, as the stock price bounced around the $4 mark. His post was going viral on WallStreetBets, a financial subreddit dedicated to volatile and chaotic trading.

In September 2020 Ryan Cohen, successful cofounder of online pet store Chewy, had announced that he had bought a nearly 10% stake in GameStop. He upped that to 13% in December and in January 2021 Cohen joined the company’s board of director, with plans to push GameStop into the digital market.

Emboldened by this news Reddit users began investing more heavily, causing the price to skyrocket in recent weeks and bamboozle the markets. At the time of writing the stock is worth roughly $350 but posts on WallStreetBets are predicting the price could rise above $1,000, or even $5,000, if those holding stock continue to do so.

As the price continues to rise there will be an understandable temptation for those who own the stock to sell their shares and take out some profit but for now Reddit users appear determined to stick with their investment. Until they start selling, there is little chance of the share price falling. For now, the original poster from September 2019 is thought to own close to $50 million worth of GameStop shares.

Wall Street undone by organised online trading

In the past the only ones with easy access to the stock markets were stockbrokers, who worked for investment firms and hedge funds in major cities. However the invent of commission-free trading apps like Robinhood has democratised the whole system and made it possible for normal people to buy and sell as they please.

The Wall Street investors who had shorted stocks of GameStop were relying on the price falling so they could get their money out but a huge surge in investment has seen the price skyrocket and left them unable to close their positions. Two big hedge funds, Melvin Capital and Citron Research, are thought to be the most exposed. The former is believed to have lost around 30% of its $12.5 billion under management already this year on a series of shorts, which includes GameStop.

“As someone who started trading stocks in the late 90s in college, I would always remember watching when the small retail trading groups would get crushed by hedge funds and savvy short-sellers,” Oanda market analyst Edward Moya said in a report. “What happened with GameStop’s stock is a reminder of how times are changing.”