Reddit Users Short Selling GameStop Stock
No, the retailer did not magically fix all it's issues overnight. The company is still having some financial trouble in spite of the big spend on video games by consumers throughout 2020 due to the COVID-19 pandemic. But one would think that with the recent rise of GameStop's stock prices, something must be turning the company around, right?
Well initially there was a legitimate tiny bump on January 11th when GameStop announced 3 new board of directors including Alan Attal, former COO for Chewy Inc. whom basically grew the company into a success via eCommerce and made it a hit on the stock market.
Thanks to Reddit, GameStop's stock started soaring this week. At the end of 2020, the stock was worth roughly $20 a share. This is up from $4 at this same time last year. GameStop stock has never really been a big bet. But over the course of the week, the stock has gone up in value almost up to $350 as of this morning. The rise came from short selling stocks.
"Shorting" is betting that a company's stock is going to lose value. Short selling is the act of borrowing stocks from a broker, and then selling it off when you think the stock hits its highest point. Then waiting on the stock to fall before you buy it back and return the borrowed stock to the broker. It's a risky move because there is always the potential for the stock to not drop; it could go higher and you have to return the stock you borrowed within a time frame.
Given that Reddit started this "meme stock" trend, you know there's more to it than someone helpfully finding a way into the system for non-Wall Street Elites. Redditers under WallStreetBets did some digging and found that hedge funds were buying up stocks for companies like GameStop, AMC, and Macy's in hopes to make a quick buck and capture the booming wealth of the early 2000's stock market game before the 2008 financial crisis (caused by hedge funds). While Reddit is open to all, the average age of a user is 23-29, likely topping out in that early 30's crowd. This age group has seen Wall Street at it's worst. They've had their livelihoods stripped while the people at the top of the food chain got richer. A quick scroll through the Reddit thread, you'll find that a number of these new investors are looking to send a message to hedge funds to stop their greed, and do some good with their newfound earnings.
Melvin Capital, the hedge fund tied to GameStop in this situation, had to close out it's short position on Tuesday afternoon after taking a huge loss.
Now some people make ask if this is a "pump-and-dump" scheme, which is very illegal. It's unlikely that regulators will get involved for now because these are all individual buyers and not an investment company. But they are watching to see what happens next.
It's quite ironic that Wall Street investors, whom have always gambled on stocks, are now complaining about "common people" also using stocks as a means of gambling.
At some point GameStop's stock will fall. So will the current push for AMC. This isn't like the usual fare of GameStop news here. It's likely to not alter any day-to-day business for the company. And GameStop will still be GameStop; the place where you can buy a new game at $59.99 and sell it back 2 weeks later for 20 cents, for them to re-sell the used product at $54.99. The parties that are most at risk in this scenario are the hedge funds, the overwhelming wealthy stock holders, and the Reddit users banking on short sells.