GameStop is a video game retailer whose name you may not be familiar with. But it’s become the focus of Wall Street since its stock price surged by thousands of percentage points in recent months thanks to amateur traders on reddit.
What is a ‘short’ in stock market investment?
When we think about the traditional stock market, investors buy stocks or shares in those things that they think will do well. For example, Apple consumers are likely to continue buying iPhones, or in 2021 companies that are producing facemasks could be doing well.
But the opposite side of that is also possible. If investors think a company is in decline and its stock is overvalued, they can bet against this company to make money. This is something known as a ‘short’ and that’s where GameStop comes in.
This is a company that has retail outlets across the United States allowing people to rent and buy video games. During the COVID-19 pandemic and before, this industry has increasingly moved online. A lot of investors thought GameStop’s business model was outdated, so they bet against it in shares by buying these shorts.
They were expecting to see its stock decline, but the opposite has happened. Some estimates are saying that this week it has risen by up to seven hundred percent.
What role did Reddit play in this?
On the social media platform Reddit’s Wall Street Bets subreddit, users have been grouping together, encouraging each other to buy stocks in GameStop and send its share price up.
They say they are doing this to fight against the system; that they are just taking part in the same sort of market manipulation that hedge funds have been doing for years now.
GameStop itself won’t necessarily become a company whose services are more in demand – but these users on Reddit will potentially have profited enormously by buying these shares for small amounts before selling them on for five, six times that amount.
On the flip side of that, the hedge funds who had bet against GameStop are now having to buy back those shorts at a hugely increased value and cover their losses, which could potentially run into billions of US dollars.
Other companies that have been shorted in the last week are seeing their shares rise. Blockbuster, BlackBerry, AMC Entertainment, even CineWorld in the United Kingdom are among them. GameStop’s stock has since fallen almost as dramatically as it rose – but this the global stock market has been shaken by a single Reddit forum, and the longer term repurcussions of this are yet to be seen.