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The Explanation Of The GameStop Havoc For Retail Investors

by Stefano Sciandra

In Collaboration With Stefano Sciandra

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The investor community witnessed one of the most unique and abstruse share price soarings in the stock market history in the last 3 days. Gamestop, an American retailer offering videogame, consumer electronics and various gaming instruments, saw its market capitalisation and share price increasing almost tenfold in a mater of days following unexpected retailer investor activities. The key question is how what catalysed such a dramatic change despite the company not offering any information to boost its share price?

The answer lies in the popular trading Reddit page Wallstreetbets, often targeting short sellers. The Gamestop’s bottom line is expected to record losses in 2021 as a result of gamers using digital software to purchase their videogames, rather than brick and mortar stores, triggered by the pandemic and global lockdowns. Therefore, it is not surprising that many investors have shorted the company’s stock. The core of the whole matter is that the amount of shorted Gamestop shared was relatively higher than the amount of actual Gamestop shares available at the market.

If you are not familiar with the term, there is an immense term to clarify what ‘shorting’ means to get a full picture of this story. In the simplest terms, the shorter borrows the security from its owner for a certain period amount of time and immediately sells it to another party. The short-seller is hoping that a stock price will go down so that he/she can go to the market to purchase the share for a lower price and give or pay it back to its first owner. In this case, the difference (delta in financial language) between the initially borrowed amount and eventually bought back amount is the profit made by the short-seller. Nevertheless, it is of the utmost importance to highlight that if the stock price goes up, the short-seller will note losses, as he must purchase the stock at a higher rate at the market and give it back to the previous owner.

As mentioned above, many investors and hedge funds had bet GameStop would lose substantial value, that is when large amounts of people on the Reddit forum decided to bought shares in the company.
The demand was so huge that it led GameStop share price to rise massively, ultimately forcing everyone who put a bet on the company’s dropping value to repurchase their shares. The market turmoil was also influenced by an Elon Musk’s tweet (of course), that further pushed GameStop’s share price.

What has been called “insane” and “never seen before” by gWall Street commentators and analyst, has led to the US Senate Banking Committee to plan to hold a hearing on the “current state of the stock market”. Wall Street has been in fact heavily criticised after the 2008-2009 financial crisis, so the reactions coming out of Wall Street have raised many eyebrows. On the one hand, Wall Street has been acting aggressively with “little repercussions” on its CEOs, on the other hand, it does not seem to care about “free market capitalism” when its very own affiliate firms and hedge funds are being attacked.

A rally of such manicures is leading to an increase in volatility. At the time of writing, shares in GameStop dived by as much as 55%, after a total rise of 700%. This has been caused by restrictions enacted by Wall Street giants against day-trading amateurs. Most brokerages firms, most notably Robinhood, are being accused of market manipulation since the restrictions imposed on GME and other companies caused a huge loss of money for many traders. The hedge funds who bet on GameStop share price to fall, have witnessed an unexpected massive reaction. The battle between WallStreet giants and amateurs is set to continue.

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2 comments

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