What is GameStop? All you need to know about Reddit-driven stock market play
What is GameStop and why is it trending?
GameStop is an American video game and gaming merchandise consumer retailer, which was hit hard by the pandemic as the company heavily relies on the physical retail space. Social media is abuzz with the company's name as the market valuation of the company has gone up 1700 per cent from $2 billion to $24 billion in just a couple of days. This surprising rise in the stocks of a video game retailing company comes as amateur traders on the internet are rallying up the shares of the company in a power struggle against the huge hedge funds of Wall Street.
What had happened?
This started in late the summer of 2020 when Ryan Cohen's investment firm infused capital in the company leading to a rise in its share. Around that time, some hedge funds had predicted that the shares of the video gaming retailer will soon start to fall. This made the company target of the short-selling. Investors usually follow the formula of buying low and selling high, however, short-sellers do the contrary.
Short-sellers borrow and sell the stocks when they are valued high betting that the stocks will plummet, hoping that when the price falls, they can buy back the shares, return to the owner and encash the difference.
Hedge funds are mostly involved in this short-selling business, however, this position is subject to a lot of risk as any good news for the company can rally up their stock prices. This trading creates the short squeeze and leaves the short-sellers with millions of shares bought on higher price and to be returned at a much higher price, exposing them to huge losses.
What's happening over the internet?
Amateur or small retail investors with their 'dumb money' are playing the real game on Reddit under a community named wallstreetbets or WSB, against the well-established 'wall streeters'. The term dumb money is used for small individual investors who are expected to lose against the market analyst, traders who trade in stocks for their living.
"We are currently looking a lot less at the balance sheets and a lot more at the chat rooms, trade quickly and avoid trying to use any valuation while trading," Bloomberg quoted Larry Peruzzi, the head of international trading at Mischler Financial Group Inc as saying.
The WSB community is upping the GameStop stocks against the huge hedge funds that had been shorting its stocks. It has now become a financial power struggle between the 'dumb money' and the wall street 'rulers'.
"If Redditors rallying GameStop is unacceptable market manipulation, what would you call it when greedy Wall Street bankers gambled away our entire economy in 2008 and faced no consequences?," Robert Reich, former labor secretary, currently a professor at Berkeley had said.
It seems like WSB has been ruling the field till now. Their upper hand in rallying up the stocks of firms like GameStop and AMC Entertainment was proven after the hedge fund Melvin Capital closed its short position and Citron Capital covered most of its short at a loss of 100 per cent.
The GameStop stocks are not only most traded in the US but in India too. The company was among the top five most traded stocks in Stockale, a platform for Indian retailers to trade in US equities, reported Bloomberg.
The magnificent rally in the stocks of the video game retailing company also had Tesla's Elon Musk tweeting 'GameStonk' giving the dynamic power show more coverage.