Suddenly, Wall Street can’t stop talking about GameStop, a video game retailer whose stock price is popping far beyond what most people think it’s worth.
Here’s a guide to understanding why and what the frenzy means for the stock market.
Why is everyone talking about GameStop?
The simplest answer is that its stock price has skyrocketed — by somewhere around 8,000 percent over six months. The more complex answer is that its stock has become the central game piece in a financial power struggle between a major hedge fund, Melvin Capital, and a group of amateur stock traders who yell on the internet.
Mike Novogratz, an investor and former hedge fund manager, said the internet activity is the result of frustration that everyday investors are often locked out of lucrative opportunities, such as initial public stock offerings.
“What it really feels like is the game is stacked against the little guy,” he said.
What is GameStop?
GameStop is a video game retailer. Like most stores that still sell products in person, it has had a hard time lately as video game sales have moved online and as the Covid-19 pandemic keeps people away from stores. It’s still in business, but few people expect it to grow again.
How did it end up in the middle of all this?
Like many companies that are in rough shape, GameStop was the subject of what’s called short selling, in which professional investors borrow shares of stock to sell and then buy back later so they can return them, which lets them pocket the profit if the stock price goes down. They’re basically bets that the company will fail.
GameStop was one of the most shorted of all publicly traded companies. Other companies on the list include AMC Theatres, Bed Bath & Beyond and even the mostly defunct Blockbuster. Remember those names.
And then GameStop became the source of a short squeeze.
What is a short squeeze?
For the most part, investors follow the “buy low, sell high” format when it comes to stocks. Short sellers do the opposite — they borrow and sell a stock when it’s high and bet that it will continue to fall. If that doesn’t happen and the stock price rises, short sellers are forced to cover their positions or buy more stocks — to minimize their losses.
Because short sellers — frequently hedge funds — in essence are betting against a company’s success, it can be a risky position. Any positive news or enthusiasm for the stock will push up the stock’s valuation, minimizing profit for the short seller. In the case of GameStop, chatter on massive online trading forums invigorated interest in buying the stock, pushing up the price, which in turn fueled more interest.
The speculative trading left short sellers with no more shares to buy to cover their positions, creating a short squeeze and leaving them with millions of dollars in stocks they had bought at a high price but which they then had to offload at an even higher price.
S3 Partners, a financial data company, said Wednesday that its analysis found that short sellers had lost $23.6 billion on GameStop this month.
How does the internet fit in?
The internet has been used to prognosticate about stocks for decades, but there’s never been anything quite like the Reddit community called r/wallstreetbets, also known as WSB.
WSB takes something of an internet extremist’s approach to investing. Its slogan is “Like 4chan found a Bloomberg Terminal,” alluding to the fringe message board and the Bloomberg computer system that is nearly ubiquitous in finance.
Amateur investors on WSB have discussed GameStop (which they refer to by its stock ticker abbreviation, GME) for years, but things changed early this year. As the price of the shares rose, more WSB posters jumped on board. “100% of my portfolio on GME because of you idiots,” a person posted Jan. 10. On Wednesday, the people who run WSB temporarily made the community private and said they were “experiencing technical difficulties based on unprecedented scale as a result of the newfound interest in WSB.”
There’s also Robinhood, the app that is the unofficial stock trading platform of choice for WSB. It lets people trade stocks and even more exotic investments, like options, for little or no charge.
So what if a bunch of people bought GameStop stock?
This is where things get a little complicated and a bit more unclear. Shares in GameStop ticked up on Jan. 11 after it named three people to its board of directors as part of a deal with shareholders who had been agitating for change. That caused some short sellers to abandon their positions, helping to drive the stock up more in the following days.
That only emboldened traders on WSB. “CAN’T STOP WON’T STOP GAMESTOP,” a person wrote Jan. 14, along with a clip from the movie “The Wolf of Wall Street.”
The stock traded about even for the next few days. Things really began to change starting Friday.
What happened Friday?
CNBC data show that the volume of shares traded — a closely watched indicator of activity around the stock — spiked on Friday. Increased volume can indicate a short squeeze, meaning people who had bet against the stock either chose or were forced to give up and take losses.
And while WSB had gotten some media attention in recent days for its GameStop boosterism, a boom in coverage of GameStop and WSB helped bring the story out of the financial world and more into the mainstream. The frenzy was on.
GameStop shares would go from trading at around $43 (already significantly more than it traded at at the beginning of the year) to as much as $380, becoming one of the most traded stocks on the market along the way.
Tesla CEO Elon Musk, the world’s wealthiest person, who has also publicly battled short sellers, tweeted out Tuesday, “Gamestonk!” with a link to WSB. Gamestonk is a reference to GameStop and to “stonk,” internet slang for stock.