The GameStop Story
The stock market was thrown into turmoil in recent weeks by extreme speculation in trading in the stock of a few struggling companies, including video game retailer GameStop. Apparently, the stock got the attention of followers of a page on social news aggregator, Reddit, called Wall Street Bets. A few flamboyant participants on Reddit made the claim that GameStop stock was undervalued and that investors should buy it. A movement began and the price of the stock began to rise.
As the news of GameStop quickly spread across social media, other retail investors piled in and the price of the stock surged. Many of these investors were seeking quick profit. But, according to posts on across the internet, they were also determined to inflict pain on the large institutional investors who were on the other side of GameStop. A kind of class war emerged.
Several large hedge funds held significant short positions in GameStop. This means they sold the stock without owning it. They did this because their fundamental analysis of the company indicated that GameStop was overpriced. If they were right and the stock price dropped, they would make a large profit by simply buying the stock and closing out their short positions.
But, as the army of retail investors betting on the stock grew, they drove the price of the stock higher. It shot up from $17 at the beginning of the year to $347 at its peak. The hedge funds were routed. They were forced to buy GameStop to cover their short positions and this, ironically, drove the stock even higher. The war ultimately ended with the stock price plummeting back to the low $50s where it is currently trading. Billions were made and lost in a matter of days.
Springwater Wealth Management
6600 SW 105th Avenue, Suite 155
Beaverton, OR 97008