The US video game company GameStop became world-famous in the first month of 2021 after its share price rose more than 2,250%. 

Revyuh explains in detail the frenzy caused on Wall Street by this financial phenomenon and the consequences it could have for the stock market in general.

GameStop, based in Grapevine, Texas, sold video games in more than 5,000 stores around the country; however, the coronavirus pandemic made sales to plummet, resulting in large losses. In addition, its potential customers are increasingly moving away from physical stores to buy online games. These factors have got the company into big trouble, struggling to survive.

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GameStop shares were selling for about $ 19.95 as of January 12 and became easy prey for hedge funds and other professional investors. In fact, they were one of the best selling stocks on Wall Street. 

In a short sale, investors borrow a stock and sell it for its true price, then wait until it goes down to buy it at a much lower price and return it to its owner. As a result, the investor keeps the difference between the original price for which he sold the share and the price he paid when buying it back in order to return it to its owner.

Punishment for Wall Street

However, a group of users of the social network Reddit called WallStreetBets were encouraged each other to buy GameStop’s shares massively in order to bring their price ‘to the Moon’. The main goal of small investors was to punish with this shot large Wall Street financial firms that benefit from the problems of others.

According to specialists, when a stock is subjected to a buying spree, its increasing scarcity causes it to rise in price dramatically, forcing short sellers to exit their bets early before losing even more. To do this, they have to buy the shares before they continue to rise, which makes them rise even higher and can create a feedback loop. 

As a result, GameStop short-sellers admitted this month that they were in serious trouble from the heavy losses they were taking. On January 26 alone, losses from short positions at GameStop exceeded $ 867 million. In total, according to the calculations of S3 Partners, they have already reached $ 19.75 billion so far this year. 

Among other troubled companies that experienced an unjustifiable stock price hike were the AMC and BlackBerry technology chain: their shares have catapulted by 525% and 112%, respectively.

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Who are the members of the group and how much did they earn?

The majority of WallStreetBets members are millennials and Gen Z, novice investors without much experience in the market. Their movement has no visible head, which makes it difficult for stock supervisors if they decide to accuse them of manipulating the market. 

Their favorite broker was Robinhood, an application that allows you to buy stocks without commission, making it as easy for an ordinary person, as ordering a coffee at a Starbucks. The aim of the system was to bring investment directly to the masses without intermediaries, “democratize finance for all”, according to its motto. 

As for the earnings of Reddit investors, according to their own comments on the social network, there are some who invested less than $ 1,000 to earn thousands more. However, a user under the pseudonym DeepFuckingValue claims to have turned 50,000 into more than $ 30 million.

What obstacles did they face?

By January 28, GameSpot stock trading put its price at $469.42. However, on the same day, the situation changed dramatically when Robinhood imposed unexpected restrictions on the purchase of the company’s shares, which at the moment plummeted to $ 132 per unit (71.8%). 

It also restricted the purchase operations of AMC, Bed Bath & Beyond and Nokia.

A large number of investors described the company’s conduct as hypocritical. A client of the broker even filed a class-action lawsuit in the Southern District of New York in which he claims that the Robinhood measure manipulated the market against its clients. 

Many politicians and businessmen were not slow to criticize the company’s attitude, including Democrat Alexandria Ocasio-Cortez and the world’s richest man, Elon Musk. 

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On January 29, Robinhood again allowed investors to purchase a limited number of GameStop shares. After the announcement, its price grew 92%, going to $ 379.71 per unit.

Reaction of the authorities and possible consequences 

Meanwhile, the situation with GameStop even caught the attention of the US authorities. Thus, Jen Psaki, the White House press secretary, said on January 27 that Treasury Secretary Janet Yellen and other members of the Biden Administration are overseeing the big moves of the company and some other actions.

According to Economics Dr Daniel Lacalle, it is a “very dangerous activity” of raising the share price artificially by uniting as a group without any fundamental justification”.

The expert stressed that collusion is a factor that is considered illegal within the market and would be devastating. 

Specialists also warn that when the rise in shares does not respond to any improvement in the profitability of the company, over time, its price tends to approach its real value. In this case, investors who sell later risk losing money.

Therefore, economists are of the opinion that it is best to first properly educate all these novice investors about the risks of economic bubbles and excessive trading in stocks.

Regardless, the GameStop phenomenon has marked a new reality for the stock market. Until now, it was driven by large funds, but now, for the first time, prices have moved from the bottom up. Experts point out that this movement could be repeated in the future. In addition, the current frenzy generated a new factor in risk analysis for investors that did not exist before.