If you are one of them who doesn't follow the stock market or stock trading much, GameStop is the name that could be heard in the past week. If you are keeping an eye on the news, you may have heard about Gamestop and how its stock price rose?
This is because the gaming and game device company, which was valued at 3.25$ per stock a year ago, saw its stock market rise by 8000 percent within 6 months. On January 26, 2021, the stock closed at $145.60, then increased to $345 the next day, peaking at $469.42 on 28 January 2021. But where did it all start?
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GameStop is a gaming company that specializes in the trading of game and game devices. So how did a struggling company with an old-fashioned business model suddenly become a hot topic about stocks?
The primary reason behind the sudden shine of GameStop is r/wallstreetbets, a subreddit on an internet forum called Reddit who was responsible to raise the stock price by 1700 per cent.
Swastika explains how GameStop is grabbing all the attention of all the investors.
What is GameStop?
GameStop is a brick and mortar company, specializing in trading of games and game devices. Before making a high buzz on everyone’s Tweet feeds, over the last few days, GameStop has had a poor record since 2017.
Furthermore, the retailer company also has hit the news for all the wrong reasons. In 2017, it came into limelight because of its Circle of Life policy. Circle of Life is a rating system that GameStop uses to convince customers to buy games, trade old ones and ensure that the money that customers get back goes towards buying more pre-owned games.
Employees were given scores to represent how they fared and anyone with low scores would likely find their job on the line.
Wallstreetbets Vs Wall Street Traders -
Before we take dig deep into GameStop’s stock, there is some lingo which would probably help to familiarize the GameStop controversy.
Day Trading:
Day trading refers to the buying and selling of stocks multiple times during the day. The primary goal is here, to make small incremental profits that add up as they trade. As you might have guessed, day trading is quite risky and is used by a lot of scam artists.
Short Selling:
Short selling is the process of selling stock and buys back the stock to return it to the lender. Short sellers are betting that the stock they sell will drop in price. For example - Company A’s stock is trading at Rs 250 and you know that after some time, the shares of a particular stock will fall. For instance, it will fall to Rs 150.
Suppose you sell a share worth Rs 250 at the market price and after a while, you may notice that the price drops to Rs 150. Now you can buy that stock at the lowered stock. Now, you return the share to the broker at the lowered price. As you sold the first share at Rs 250 and bought the same share at Rs 150 before returning to the broker, you are left with Rs 100 as a profit.
Hedge Funds:
Hedge Funds are a group of investors usually controlled by a money manager. These hedge funds are designed to make profits by short selling stocks on falling stocks. A big hedge fund has a pool of investment money which allows investors to invest aggressively and make complex investments for a bigger payout.
Till 2019, the stocks of the GameStop had been continuously falling. Reddit users heavily noticed about the heavily short hedge funds selling the stock, particularly the $13 billion hedge fund Melvin Capital.
In mid-2019, a Reddit user named (Roaring Kitty) posted that it had made an investment of $53,000 in the GameStop. Though the post didn't receive any intentions then, however, the users frequently tweeted about the GameStop investment and retail store.
Last week, the news came into the limelight and the retail store caught the attention of many young online traders. This in result, the share price rose to unwarranted levels.
According to the source, short-sellers lost an estimated $23.6 billion on GameStop. Melvin Capital lost 30 per cent of the $ 12.5 billion it invested in managing shorted stocks.
Concerning the whole situation, Wall Street demanded that short selling be made illegal, even though it is majorly used by the traders. To stop further stock crashes, many popular trading apps such as Robinhood stopped the purchase of Gamestop stock on their stocks.
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