The internet is going crazy after GameStop stock price surged by 135% on Wednesday. At its peak, it hit $372 per share and it’s all down to a bunch of Reddit nerds who’d grown tired of Wall Street bankers’ bullshit.
Whether you’re new to the world of investing or you’re just nosey and live for the drama, don’t worry cos I’m here to explain what’s happening in simple terms. You might still have questions at the end and that’s completely fine. Unfortunately I can’t answer them all but hopefully this will give you a starting off point so you can comfortably do further reading without feeling like you’re trying to decipher a foreign language.
Why did GameStop’s stock price increase?
Basically, a group of traders joined forces to take on some of Wall Street’s richest and most sophisticated investors and brokerage firms.
Shafting the short sellers
It all started when one Redditor uncovered a list of struggling companies that Wall Street had decided to bet against (this is known as short selling and I’ll go into a bit more detail later). In an attempt to screw with the big guys and make some money in the process, this same Reddit user encouraged others on the r/WallStreetBets subreddit to buy shares of these same companies.
When a company experiences an increase in the number of people buying its stock, the price of each stock typically rises due to demand - and that’s part of what’s happened here.
Of the list of shorted stocks, the one that Reddit users turned the most attention to is GameStop, a US video game retailer that’s been struggling for a while.
An individual stock at GameStop cost just $19 at the start of the year but when markets closed on Wednesday afternoon, it was at $348.
AMC Entertainment rose 300% on Wednesday and BlackBerry is up more than 275% this month, in part thanks to WallStreetBets’ campaign.
Options contracts
Not only have Reddit traders rushed to buy GameStop stocks, many have bought what’s known as options contracts. To put it simply, an options contract is an agreement where a buyer says to a seller “I’m not going to buy the stock at its current price, but I will buy it if it reaches £X.” This video explains options contracts more detail.
The NY Times explains: “As more traders snap up options, the brokers have to buy up more shares, driving the astounding rise in the company’s stock prices. […] Another reason the shares are rising so quickly is that, until recently, they were heavily targeted by big investors who bet the stocks would decline by taking on short positions. As the shares surge, the shorters also have to buy the stock in order to cut their losses, and that triggers a so-called short squeeze — a sudden spike in a share’s value.”
Lost? Don’t worry, this will hopefully make more sense when I explain short selling in a bit more detail.
How does short selling work?
If you’ve seen the movie The Big Short, the term ‘short selling’ might ring a bell, as it depicted Ryan Gosling, Christian Bale and Steve Carell shorting/betting against the housing market right before the 2008 financial crisis.
It’s possible to short stocks too. When you buy a stock, you’re essentially passing a vote of confidence for the company you’re investing in. You’re pretty much saying ‘I believe this company will do well and make me money’. Short selling is kiiinda the opposite to this. When you short a stock, you’re betting against it and saying ‘I think this company will do badly and when it does, I want to make money.’
This is exactly what the big Wall Street investors did. They saw that GameStop and other companies were failing and used this to their advantage. This isn’t illegal, though it is extremely risky. I’d recommend watching the documentary Betting on Zero to learn how short selling can be used for good, well, sort of. In it, we see multi-millionaire investor Bill Ackman loudly shorting Herbalife as he believes it’s the largest pyramid scheme in history and wants to see it crumble.
Anyway - you might be wondering how you would go about shorting a stock if you found a company you were convinced was on its way out. It’s not like you log onto Paddy Power and place a bet that way.
The strategy involves selling a stock today and buying it back in future, on the assumption that the price of it will go down. It’s the opposite to a more traditional approach to investing where a buyer might purchase a stock for say $50 and sell it at a later date when the price has gone up to say $100.
One thing short sellers have in common with traditional investors is that their intention is still to ‘buy low sell high’. The difference is that short sellers are selling high on stocks they don’t yet own (I know. WTF?) today and buying them for cheaper in the future.
Problems arise when someone shorts a stock only for the stock’s value to increase, rather than decrease as planned. They’re then left having to give back the stock they borrowed even though they’ve not made the money they thought they would.
You might be wondering how the hell you sell a stock you don’t own. That sounds mega illegal - but it’s actually not. This video explains the process in detail.
If you don’t have time to watch it, here’s a really basic explanation of how it can work… using bananas:
So in this scenario, the apes are the r/WallStreetBets traders and the snakes are the big Wall Street brokerages. Last week, one of the apes realised that GameStop was in what’s known as a ‘negative float’ position. This means that the number of shorted shares is greater than the number of shares available to trade. This is a problem because the snakes borrowed the shares (just like they did with the bananas) and must eventually return them. The only way to return them is to buy GameStop shares in the traditional sense… but as long as people keep hold of their shares, there’ll be none available to buy. This leaves Wall Street in quite a bind.
Why is this such a big deal?
Well, first of all it’s left Wall Street firms crying out for the US government to intervene, after years of insisting government stay out of it and impose as little regulation as possible. Second of all, while Reddit traders are treating this like one big game, their own finances are at risk.
The stock’s price is arguably inflated way past what experts believe the company’s shares are actually worth. When establishing the value of a stock, a number of factors are taken into account such as the company’s profits and growth potential. In GameStop’s case, all evidence suggests its stocks are not worth the amount many people are paying for them. This will likely cost GameStop investors in the long run, even though they might be swinging their dicks around and acting all Billy Big Bollocks right now.
Is this a classic case of the little guy sticking it to the big man?
I’m sure many in the personal finance industry would agree with me when I say this simply isn’t a case of the rich versus the poor. We’re not watching the little guy sticking it to the big man - though Reddit users would like to think of it like that.
u/toastthebread writes: “DO NOT FUCKING SELL. THIS IS BIGGER THAN MONEY NOW. EVERYTHING NOT GME IS THE HEDGEFUCKER’S DISTRACTION AT WORK. You have a once in a life time chance to be apart of something great. These hedgefucks need to be taught a lesson. This isn’t about money anymore. This is about what is right. It’s about core values of freedom, of triumph over evil. The American story sold to us by Hollywood fucks that we might as well believe, that the little guy can beat the big guy.”
Many of those who’ve taken part in GameStop’s stock increase will have been reasonably wealthy long before this all began. There might be some newbs who’re just trying to make a bit of money despite not knowing what they’re doing, but many will be seasoned traders who know the risks involved and are treating this as a form of entertainment. As Alexandria Ocasio-Cortez explains below, they’re treat the stock market like a casino - though this is something Wall Street’s biggest players have done for decades.
Who are the biggest winners from this?
CNBC reports that GameStop’s three largest shareholders have become overnight billionaires thanks to the stock price surge.
Ryan Cohen, co-founder of Chewy bought 10% of GameStop stocks in August but increased this to 13% in December. His initial £75m investment is now worth $1.3bn.
76-year-old Donald Foss, who founded a sub prime auto lender company called Credit Acceptance Corp, has also won big. GameStop’s CEO George Sherman has seen his 3.4% stake in the company increase to $350 million.
With many WallStreetBets Redditors bragging that their portfolios have skyrocketed to seven-figures thanks to their teamwork, many might be eyeing up new houses on Zoopla (or Zillow, if they’re American) but they’d be wise to not count their chickens just yet. Their profits aren’t technically real until they sell their shares… which many are reluctant to do because of the hope they’ll continue to rise.
Their wealth might look good on paper, but the stock market is so unpredictable and so prone to fluctuations that their streak is likely to be short lived. Investing experts and business analysts are in agreement that GameStop’s stock price is inflated and unlikely to stay that way for long - even if Wall Street has descended into chaos as it tries to rectify the problem.
GameStop’s biggest winner, Ryan Cohen, bought his shares to shape the company’s direction and would be extremely unlikely to sell his shares. Many Redditors are vowing to keep hold of theirs too, claiming that by working together, the stock price will continue to increase.
However, the losers will wind up being the ones most loyal to the game who stick around when everyone else decides to play it safe and quit while they’re ahead. When the stock price drops, those still holding shares may wind up with little to no profit at all, or worse - less than paid for the stocks in the first place.
Should I buy GameStop stocks now?
I personally wouldn’t touch GameStop stocks with a bargepole because the price is so ridiculously inflated and doesn’t make any sense whatsoever. It’s extremely unlikely to last. You could fork out $300 for a GameStop share today only for it to drop to $50 the following day and never recover.
I’m not in a position to give financial advice or tell you what to do because I have no formal finance qualifications and I’m not an experienced investor.
