Last week, the share price of the American company GameStop rose rapidly. Where the price of a share was just below $ 40 last week, yesterday afternoon the price reached $ 350. How is it possible that the price of a company that seemed doomed to death rose by 1,700 percent in one week?
The short answer: small private investors have joined forces to fight the big boys of Wall Street, the hedge funds. They were determined to teach Wall Street a lesson, and they have largely succeeded.
You may have been aware of all the media attention so far. But how can a group of investors ever achieve this? We try to answer any questions you may have.
1. What is GameStop?
GameStop is an American retail chain that sells video games. Until recently, GameStop seemed doomed. More and more video games have been bought online for some time now. Now that people cannot go to the stores due to the corona virus, the company received another blow. It is not bankrupt, but few people think that the company will grow again.
2. Why is everyone talking about GameStop now?
As with many companies that are doing badly, large hedge funds bet that GameStop would get worse and the stock would lose value. We call this short selling or going short.
3. Ok wait, what does going short mean?
When an investor goes short, he sells shares that he does not own, only to buy them back later at a lower price.
That probably still raises some questions. Because how can you sell shares that you do not own? If you go short, you borrow an investment product (such as a share in GameStop) that you immediately sell for the current (high) price. As soon as the price falls and the value has fallen, you buy it for the lower price and give the share to the party who lent you the share.
- Suppose the price of a share is now 100 euros.
- We expect the share price to fall due to bad news about the company.
- We then borrow this share from a bank and immediately sell it for the current high price of 100 euros.
- Our prediction comes true and the rate drops to 50 euros.
- We buy the share for 50 euros.
- And we give it back to the bank that lent us the share.
- The bank that has lent the share does want a small fee.
- But suppose this is 3 euros, then we have earned 47 euros in this example.
GameStop was one of the most shortened companies on the stock exchange. But while hedge funds and other professional Wall Steet men went short on GameStock, amateur investors had on Reddit another idea.
4. What exactly happened?
The fight between Redditusers and Wall Street started last week, on the subreddit r / WallStreetBets, where some 2 million Reddit users are discussing stocks. These users had been discussing GameStop for years and saw the opportunity to hack hedge funds while making money at the same time.
GameStop’s share price jumped about 13 percent when the chain announced three new board members on January 11. So much for normal development. The board members would bring digital experience with them and that appealed to investors. Earlier in this article we concluded that GameSpot really needs this digital experience. But something crazy happened: two days later the price rose 57 percent, and then 27 percent. It didn’t stop there: a week later the price rose twice 10 percent and another day another 51 percent. The high point came this week, when the price first rose 18 percent, then 93 percent and then (yesterday) doubled again.
The price rose so dramatically in value for two reasons: some short sellers bought shares to limit their losses and at the same time Reddit users urged each other to buy GameStock shares. This created a short squeeze.
5. What is a short squeeze?
They are often hedge funds that go short as this is a risky position. Any positive news about a stock (such as the three new board members) can cause a stock to rise, so that you earn less as a short seller. If you have gone short and your prediction does not come true (the stock is rising instead of falling), you will be forced to buy new shares or at some point take your loss and buy back your shares at a higher price, to limit further damage.
WallStreetBets users pushing each other to buy GameStop shares pushed up the price. This only increased interest in GameStop shares. While the stock was just below $ 40 last week, it rose to $ 350 on Thursday afternoon.
We did it guys.
GameStop $ GME was the most traded stock in one day today.
I can’t wait for tomorrow. 🚀🚀🔥👀 pic.twitter.com/VLM8V8qKaB
– Reddit Trading 🚀 (@reddittrading) January 27, 2021
Two hedge funds threw in the towel as a result and lost a lot of money. The estimated loss amounts to 70 billion dollars, converted to about 58 billion euros. The Redditusers have actually earned money from the price increase.
So spoke The New York Times for example, with a 16-year-old high school student who earned $ 750 from his GameStop stock. “It’s a good chance to make money while making fun of the hedge funds,” he told the newspaper. “Buying GameStop makes it feel like we beat them in their own game.” But $ 750 is nothing on the amount the biggest stunt winner has earned. He managed to make $ 50 million out of $ 50,000.
6. How is this stock market madness reacted?
The news is causing a stir. President Joe Biden’s economic team is closely monitoring the situation and several investment platforms are halting trading of GameStop’s stock. That has caused the GameStop course to collapse like a house of cards.
Some Redditusers will therefore also have to incur losses. But for many it will still feel like their mission has succeeded. “You have such an impact that these ‘fat cats’ are afraid that they actually have to go to work to make a living,” wrote a moderator from WallStreetBets this week. “That warm feeling you feel is called respect and it is well deserved. Wall Street can no longer ignore your presence. ”
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