Traders and Activists make Gamestop Stock Skyrocket
The stock price of GameStop, ticker symbol GME, skyrocketed in late January. It reached a peak of $483 per share on Jan. 28, which was well over twenty times greater than the price range it occupied in December 2020. The stock has since plunged to around $50 per share and remains volatile.
“DeepF–ingValue,” a user of the social media site Reddit, has been posting updates on the status of his investment in the video game retailer GameStop since September 2019.
“Damn, you’re really determined to make that money disappear. Props,” said Reddit user “LincolnAtTheTheatre” on Dec. 11.
By late January, “DeepF–ingValue” had made millions.
Many of the contributors to the subreddit forum r/wallstreetbets have been widely credited for working together to buy shares and drive up the stock price of GameStop, AMC Entertainment and others. The subreddit’s description reads: “Like 4chan found a Bloomberg terminal,” referring to a notorious social networking site and a computer software system used by finance professionals, respectively.
Associate professor of finance and actuarial science Toby White explained the unusual mechanics that lead to the GameStop surge.
“…The movements in stocks in GameStop are not really being driven by financial fundamentals, things like earnings, revenues, profits and dividends,” White said. “They’re more being moved by investor sentiment… the investors all getting together and having a unified message that we need to buy, and once we buy on, hold the line, don’t sell.”
Drake junior and investor Mikayla Simpson said she didn’t consider purchasing any shares because GameStop’s stock was too volatile.
“I understand that there’s a difference between the price of a stock going up because of some kind of news, or social thing, compared to if the company had actually done something new to improve their company,” Simpson said.
White believes there were three specific factors contributing to GameStop’s rapid ascent.
“Number one, [the Reddit investors] want to make money,” White said. “Number two, it has been built up on these social media platforms that it’s a war between [the Reddit investors] and the more traditional hedge fund, Wall Street type of investor…that’s probably fueling the fire.”
White also shared his thoughts on investors’ reasoning for purchasing GameStop stock.
“I think that [a fondness for Gamestop] is a factor for some of the most naive investors, but for the more experienced of the day traders and the people who have been doing this for more than just the last few weeks, maybe a couple years, they’re just out to make money,” White said.
Dan Langworthy, president of the Investment Club at Drake University, thinks that this type of investing is not the purpose of the stock market. He believes that GameStop is a bad investment, and he says that the Reddit investors’ actions could be seen as market manipulation.
“[The financial markets are] supposed to allocate capital to companies, to build up and invest,” Langworthy said. “But now it’s almost being used as trying to get to 21 and hit blackjack, when it’s not really meant to be like that.”
Simpson sees GameStop’s rise as a display of the power of individuals.
“I thought it was a power of capitalism,” Simpson said. “Like, we all get together, we all mess with the market based on what we want…I just thought it was really powerful.”
Many small investors became angry when Robinhood Markets Inc., a financial services company that markets itself as a democratizer of investing, put a block on users’ ability to buy certain volatile stocks, including GameStop, on Jan. 28. Robinhood later replaced the ban with temporary purchasing limits.
Simpson was outraged by Robinhood’s restrictions.
“I was actually really, really upset about it, to the point where me and all my friends in our group chat in our trading group actually transferred all of our portfolios out of Robinhood because of it,” Simpson said.
Many of the Wall Street Bets investors, or “Redditors,” are angry at Wall Street because certain hedge funds short sold shares of GameStop, hoping that the stock price would go down.
Langworthy describes short selling as selling a stock before you buy it.
“Someone basically gives you a block of shares, and then you sell it, and then sometime in the future you have to return the same amount of shares back to them,” Langworthy said. “…Of course, you want the price to go down. And it’s a very controversial topic too, because you’re hoping a company fails… Some company fails, one company wins, and that’s what happens when there’s a short selling.”
Simpson says that short selling by hedge funds can negatively affect stock prices, and described these investors’ actions as “basically betting against the American economy.”
As the GameStop’s stock climbed higher, the hedge funds’ losses soared as well. The Wall Street Journal reported on Jan. 31 that the hedge fund Melvin Capital Management LP lost 53 percent of its investments in January. White says that the hedge funds’ losses were “magnified” because they borrowed funds to short sell more shares of GameStop, a move known as financial leveraging.
Short sellers in this situation do not always have the option to wait until the stock price goes back down. According to White, lenders may issue a margin call that can force short sellers to buy the shares back and accept their losses.
“[The Reddit investors were] trying to [make] their losses so astronomically large that they have no choice but to close their position and then buy their shares back to close out their short position,” Langworthy said.
However, not everyone who made money off of GameStop’s rise were small investors. The Wall Street Journal reported Wednesday that one hedge fund, Senvest Management LLC, made almost $700 million from their investment in GameStop.
The GameStop frenzy may also inspire new regulation of financial markets. Reuters reported Thursday that Treasury Secretary Janet Yellen met with officials from regulatory agencies, including the Security and Exchange Commission, to discuss the recent volatility.
White and Langworthy both think that small investors may continue to band together to influence the markets. Additionally, they foresee hedge funds making more cautious trades in the future.
“I think… [the hedge funds] may have to be a little bit more cautious in the near-term future, and not take as wild positions, short or long,” White said. “A lot of those companies are now having to deleverage, and maybe be a little more respectful of risk constraints to limit their losses in times like this. So it’s maybe a lesson learned there.”