Gamestop: A New Age For the Market or a One Time Fluke?

In January 2021, investors saw the rise of an unexpected stock, Gamestop. Months later, the stock still holds strong.

An+armchair+investor+watches+the+Gamestop+stock+increase+in+value.+

Dimitris Chapsoulas / Unsplash

An armchair investor watches the Gamestop stock increase in value.

In 2008, the United States suffered a major financial crisis due to the burst of the housing bubble. Hundreds of thousands of people lost their jobs, and the nation fell into a recession. During this time, the stock market completely collapsed as a banking company, the Lehman Brothers, declared bankruptcy. Each month, the labor department hemorrhaged jobs; in September 2008, more than 159,000 jobs were lost, which was nothing compared to the whopping 240,000 jobs lost the following month. 

During this crisis, the only ones who truly suffered were the newly unemployed. Wall Street executives were largely saved by massive government bailouts, spurring protests from workers and activists as the government continued to prioritize the 1% over suffering essential workers. The movement was dubbed “Occupy Wall Street,” which amplified the message of the growing economic disparity between workers and the 1%.

Unfortunately, economic inequality has only become greater in the past dozen years. Many bills made by previous President, Donald Trump, cut taxes on the 1%. Since the pandemic, slogans such as “Tax the Rich” have become more popular in the mainstream vernacular, as the wealthiest Americans have seen huge profits, while the poor and middle class suffer. 

The Coronavirus pandemic has caused small businesses to suffer huge losses, with many closing their doors due to a lack of business. Simultaneously, large corporations such as Amazon.com prospered as millions flocked to online commerce in a panic. In the early days of the pandemic, Amazon’s online food delivery services were so popular that it was hard for customers to find time slots in which to order. 

The increased reliance on big businesses over mom-and-pop shops hit the job market hard, as many people were burdened with unemployment during the biggest crisis of the decade. 

Maybe it was due to desperation, maybe it was due to sheer boredom, but in the wake of the economic crash, a small community of armchair investors began to grow. Investing had become much easier as commission-free trades of stocks had become accessible with apps such as Robinhood. 

A small sub-community on the online platform Reddit called r/wallstreetbets was created, in order to offer amateur investors a chance to communicate with one another and try to make money. Theories and plans were spread through the community’s forums, as members attempted to bring in income amidst the crisis.

One member of the community, Keith Gill, theorized about stocks constantly. Day and night, he looked over stock reports and company reports to determine the best future stock in which to invest. Gill’s magnum opus was Gamestop, a video game retailer that seemed to be on its last legs. 

Gill theorized that Gamestop’s stock would rapidly go up due to the new management, promising financial reports, the public’s continued demand for physical copies of games, along with the release of new gaming consoles. 

There was one problem with this plan — most of Gamestop’s stock was short-stock held by hedge funds, meaning they were effectively betting that the stock would fall and the company would come close to bankruptcy. These hedge funds planned to borrow Gamestop from brokers, and then sell Gamestop for the market price. The hedge funds expected the price of Gamestop stock to decrease, and after a period of time, they planned to buy the stock back in order to return it to brokers when it was at a low price. Because the stock sold for a large amount before, and was then bought for a very small amount, hedge funds would make money out of nothing. 

This created a small window of opportunity for people like Keith Gill, who believed in Gamestop, to attempt a short squeeze. A short squeeze entails raising the price of a stock rapidly so that when hedge funds eventually have to rebuy the stock, shares go at a much higher price than anticipated. This idea was not a large leap for Reddit’s armchair investors, as they knew they had the massive numbers to pull this off, with little risk. On the other hand, the consequences would be immense for hedge funds, who would face huge losses, if the amateurs were successful.

From January 22nd to January 26th, 2021, Reddit users on r/wallstreetbets set their plan in motion, riding the wave, as more and more people began to invest in Gamestop. A big motivator was Tesla CEO Elon Musk tweeting out: “Gamestonk!!” in support of the cause. This acted as a war cry for the Reddit users who recognized the Gamestop movement’s momentum and began to buy even more of the rising stock.

As Gamestop’s share price continued to rise, many hedge funds and short-sellers were forced to abandon their hold on the rising stock out of fear that the movement would continue to accelerate. Hedge funds would be forced to buy Gamestop back at an extremely inflated price. “This situation was inevitable. All the hedge funds did was cry to other rich investors when normal people did what they do on a daily basis,” said Jennifer Lee ’22.

The price of a share in Gamestop surged from only a few dollars initially to over 490 dollars per share. This caused the company’s value to surge to a worth of twenty-eight billion dollars. This success caused Reddit to look for more beloved companies that were being shorted. Together, they mobilized once more to short-squeeze AMC and Nokia.

As Gamestop grew more popular, Redditors continued to spread the message of investing in Gamestop. Most of the community’s largest discussions focused on fighting the urge to sell the stock. Their gamble was that the longer they held onto their stock, the more money hedge funds would lose. 

However, large corporations quickly took a stance against the armchair investors, with giant communication services like Discord and Facebook acting to take down retail investing groups, and the trading platform Robinhood prohibiting the purchase of stocks like Gamestop, AMC, and Nokia. Additionally, the original r/wallstreetbets was also taken down for a short period of time, creating an overwhelming amount of outrage.

Robinhood was immediately hit by significant popular backlash, as they removed the ability to purchase surging stocks, but did not remove the ability to sell. This artificially altered the market of these stocks, causing their value to go down. Instantly, lawsuits were filed against the company, and an SEC (Securities and Economic Commission) investigation was launched. 

Gamestop is currently at somewhat of a standstill; the price has fallen significantly from when it was at its peak, but it is still worth upwards of 150 dollars. Some former members of r/wallstreetbets are continuing to hold strong against the hedge funds, as either an act of protest or in hopes of recouping losses from buying at the height of the craze, and many have no desire to stop any time soon. 

Furthermore, Gamestop wants to continue the craze, announcing that it would sell 3.5 million shares if it becomes a common stock, although it plans to cap stock offerings if it raises one billion dollars of total influx in capital. Overall, Gamestop seems to be planning to abuse this system and may become the catalyst to further wars between short-stocking hedge funds and Redditors.

From January 22nd to January 26th, 2021, Reddit users on r/wallstreetbets set their plan in motion, riding the wave, as more and more people began to invest in Gamestop. A big motivator was Tesla CEO Elon Musk tweeting out: “Gamestonk!!” in support of the cause. This acted as a war cry for the Reddit users who recognized the Gamestop movement’s momentum and began to buy even more of the rising stock.

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