You’ve probably heard all the fuss over GameStop stock recently, and know it has something to do with Reddit and hedge funds. If you’re as clueless about stocks as most of us are, then Twitch streamer TheStockGuy is on hand to break it down simply.
GameStop, the high-street/mall retailer of new and used games and hardware, has been seen as a struggling business because of the trend of gamers buying their games digitally, instead of discs.
As a result, its share price has been on a downward trend, although with some resurgence thanks to new management and the launch of the newest generation of consoles from PlayStation and Xbox.
Reddit’s GameStop stock game
If you don’t know the first thing about the stock market, you might be wondering why there’s so much fuss being made over the huge increase in GameStop’s share price, which reached over $300 on January 27. One week earlier, it was only $39.
This is largely down to a subreddit called r/WallStreetBets – but how did they do it, and why?
Twitch streamer TheStockGuy, who does live investing on stream, took some time out on January 27 to explain it, in the most understandable way possible.
Shorting
He begins by explaining that ‘shorting’ is when an institution (a hedge fund in this case) borrows stock, sells it, waits for the price to fall, then buys it back to return it – profiting off the difference. But, if the price rises instead, then they have to buy it back at a higher price – which can be very costly.
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Short Squeeze
The ‘short squeeze’ is what r/WallStreetBets has caused. When they caught on that a company had shorted 140% of GameStop shares, they were able to drive the price of the stock up, simply by buying it in droves.
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“A short squeeze is when a stock is going up, [the hedge fund] borrowed those shares, and they’re now underwater – those shares are worth more than they borrowed. And if that continues up, at some point they have to cover their shares – they have to buy those shares back at whatever the current price is.
“They now have to spend billions of dollars to buy shares, way higher than what they borrowed them at, which in turn, drives the price up more, rinse repeat. And when a bunch of degens found out about this, ‘we can now f**k this guy over and make money if they have to dump capital in and shoot the price up? Thank you.’ And the last nail in the coffin was old Elon Musk.”
Elon Musk tweeted about the frenzy, sending it even further into the public consciousness. The situation has now reached the White House, the Biden’s administration reassuring reporters that they are keeping an eye on the situation.
Meanwhile, the WallStreetBets Discord server was shut down, although Discord says it was because of hate speech and glorifying violence, rather than their financial activities. Respondents on social media were suspicious of the coincidental timing though.
Who knows where the situation will escalate from here, but eventually the train will come to a stop, TheStockGuy says. And before it does, investors need to know when to get off the train.
