Column: Will’s Business Corner
BY: Will Pembroke, Multimedia SHow Manager
While much of America’s focus the past week has centered on recently sworn-in President Joe Biden’s agenda for his first 100 days in office, a group of high-stakes Redditor’s had another idea.
GameStop, if you did not know, was on track to go out of business this year. The electronic and video game retailer has struggled in the past few years, closing many locations around the country. Like most retailers, COVID-19 took away valuable foot traffic which plummeted their video game sales.
As a company, GameStop relies heavily on the video game trade-in market, which prior to the pandemic, was responsible for around half of all of their sales each year. Prior to the past week or so, GameStop’s stock price had fallen below the $5 per share mark — a nearly 150% drop-off from where it was only two years ago.
Seeing as though GameStop was struggling so much, and that their stock price had been going down year by year like clockwork, several Wall Street hedge funds opted to short their stock price.
A hedge fund, in broader terms, is a method of alternative investing specifically designed to help protect investors from uncertainty in the stock market. Hedge funds are typically led by managers who have spent time on Wall Street, developing good relationships with major investment banks. These managers also tend to be more privy to information about individual stocks and even the market in general than the average investor, often leading to more investment success.
What does it mean to short a stock? The best way to understand this is to look at investing in the stock market as a form of gambling. When an investor buys shares of a given stock, they are hoping the price of those shares accrues more value than their original investment over time.
On the contrary, when an investor, or in this case a hedge fund manager, decides to short a stock, they are betting against the price of those shares. Investors who are shorting a stock want the price of the stock to fall short, hence the name, of the price per share they purchased the stock at.
Fast forward to this past week. A Reddit group by the name of @wallstreetbets got wind of a recent uptick of shorts of GameStop stock by several well-known hedge funds. In retaliation, the group decided they wanted to buy up shares in GameStop to raise their stock price and short squeeze the Wall Street hedge funds.
Short squeezing in very basic terms means that the price of the stock which was being shorted goes up, holding it at a price higher than where the shorts on the stock were purchased. This renders heavy financial losses to the investors in the shorts: in this case, hedge fund managers.
GameStop’s stock price, which had been losing tremendous amounts of value, went from trading at around $10 a share to as high as almost $350 a share seemingly overnight. This unprecedented boom for GameStop shocked the market, with many on Wall Street calling foul play as their shorts began losing money fast.
The highest point for GameStop stock thus far occurred on Jan. 27, trading at about $347 per share. The very next day, one of the fastest-growing mobile phone investment apps — and preferred investment platform by many in the Reddit community — called Robinhood, stopped allowing its users to invest in GameStop stock. The online platform cited unusual volatility in the market as their reasoning for stopping trading, rendering those who had already invested in the stock exposed.
An educated guess as to why the company prohibited further trade was that Robinhood was facing pressure from those on Wall Street, especially hedge fund managers at major firms who had been suffering heavy losses, to halt investment.
The price of GameStop stock cratered to roughly $190 per share after market open on Jan. 28. Robinhood received major blowback from the online community, and even a lawsuit was launched against the company.
The story to watch for in the coming weeks is the struggle between the big time Wall Street hedge funds and wealthy investors versus the common investors. Who will win in the end? Will GameStop stock continue to hold at its astronomical price? And for how long? Like anything in the stock market, we will only know in time.