GameStop’s Sudden Surge in Stock Prices

gamestop stocks

In an increasingly online world, the role of GameStop was steadily diminishing. People do not feel the need to visit physical stores to purchase video games, instead utilizing online platforms to buy them. Furthermore, with the on-going pandemic, people have avoided going out as much as they once did. However, with the intervention of a thread on a prolific social media platform called Reddit, the tables seem to have turned more rapidly for GameStop than any could have imagined. A subreddit, r/wallStreetBets, was what changed matters for GameStop. Perusers of this subreddit often attempted to beat out short-sellers by attempting to predict which stocks the short-sellers were after, since they did not like how short-sellers exploited the market and financial system to make profit. Short-sellers are investors who essentially pay to borrow stock for a predetermined period and sell it back to the companies later hoping to make a margin profit. Although, if the price of the stock increases when it is time to sell back the stock, short-sellers lose money. Similarly, there are hedge funds, which are groups of wealthy investors that use risky tactics, such as investing with borrowed money. Short-sellers and hedge funds benefit from the value of the asset falling, rather than rising, meaning that they try to look for companies that are declining to make a profit. In less words, these people make a gamble on whether a company’s stocks will crash or not.

Some retail investors on Reddit noticed that more investors were beginning to short $GME (GameStop stock), and so they urged others to invest in $GME, in that once it was time for short-sellers and hedge funds to sell back the stocks, the price of the stock will have risen so much that these investors would lose a significant amount of money. As a result of this, short-sellers and hedge funds are rapidly trying to buy $GME, so that their net loss is not as great. Subsequently, the stock price continues to rise, adding upward pressure on the stock. On Wall Street, this is what is known as a short-squeeze.

There is a remarkable short-squeeze taking place, and that is why GameStop stock has been so volatile lately. One year ago, it was valued at $4 a share, and in late January the price skyrocketed to almost $350 a share. This type of growth is astonishing, so much so, that it will undoubtedly have an impact on the free market. At least, a number of stock trading apps thought so. Robinhood, a commission-free trading app, restricted trading in $GME and other copiously shorted stocks because of their growth. This means that it blocked day-traders from opening new positions and purchasing those stocks, instead favoring the rich short-sellers and hedge funds. This may have been a major factor involved in the short-squeezes, as only the short-sellers and hedge funds were able to trade.

The exponential growth of GameStop stock may seem like an anomaly, but is not unprecedented. In fact, in 2008, hedge funds were very focused on Volkswagen stock, which led to a squeeze. The price of the stock increased exponentially, doubling in value by the end of the month. However, in the next few months, the stock slowly started drifting back towards its original value before the squeeze. This seems to be the trend that most heavily shorted companies follow: rapidly enter a short-squeeze, then gradually fall back to the original stock price. GameStop is no different from these companies. It has been a few weeks since $GME skyrocketed, and already, the price has fallen from its summit at $350 to approximately $50. Still, this is much higher than its previous price. In the next month or two, the price will likely decrease, leaving GameStop where it started: struggling. GameStop is renowned for being a brick-and-mortar electronic gaming retailer in a society led by the internet, and was floundering before the intervention of Redditors. This upsurge definitely will prolong the existence of GameStop, but will not go so far as to prevent it from ultimately filing for bankruptcy or the liquidation of its assets.