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Tell us one thing that’s common between a gaming company going out of business, a Reddit forum and a group of hedge fund investors. Well, you might have guessed it right! It’s GameStop! This stock trading frenzy of 2021 is phenomenal and truly iconic in itself as a gaming retailer company GameStop announced in December 2020 that it will be closing down but what no one predicted was how it turned how a Reddit community page of wall street suit men will bring it back to life! If you aren’t able to figure out how, then check out our exclusive read on GameStop explained!
Why was GameStop Shutting Down?
GameStop, a video game retailer posted that they have suffered a $470 million (3427 crores) loss in 2019. After that, the COVID-19 pandemic started, the company had to postpone or terminate all projects and work because of the lockdown. Due to the lockdown being stretched for a longer duration, it was reported that the company would shut down 300 branches permanently. GameStop stocks had been battling alongside different retailers for quite a long time, even before the pandemic hit. The cost of GameStop stock fell to $3.25 per stock.
This was seen as a golden opportunity by the Hedge Fund named Melvin Capital who made a bet against GameStop stock by short-selling its stock. This means that if the share value falls further, they will buy the less valued share and will have an overall profit.
Short Selling Explained!
Short-selling is a stock market term is simply a reverse version of buying a stock and selling it on a “higher value”. In short-selling, when stocks of a certain venture are falling in terms of its price, we borrow its share from one of its stockholder at a smaller fee. Now, we wait and expect the price to fall even more as its value goes down, we will buy the stock and return it to the lender at an even lower price thus making an overall profit.
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What did the Hedge Fund, Melvin Capital do?
Now, as the GameStop’s stocks were falling down, Melvin Capital used the masterful trick of short-selling to make a profit over it. The aim of this hedge fund was to dump the stocks of GameStop which will result in its shareholders selling their stocks out of panic and thus their overall price kept going down. This is when Melvin Capital’s plan was to swoop in and buy those devalued GameStop stock back and return it to the lender. Ironically, short-selling is also known as Vulture capitalism.
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WallStreetBets, the Reddit Army
When GameStop’s stock value was continuously falling, r/WallStreetBets, a Reddit community of stock traders, with over 3.4 million users, got to know about it. Many of the members of WallStreetBets were actually against hedge funds and their ideology of hunting on failing businesses. So, they decided to do a massive coordinating buying of GameStop’s stocks.
Another phenomenal event that happened amidst this massive buying was when Elon Musk ushered in and tweeted to his 40+ million followers to buy the GameStop stock. Turns out that the Tesla CEO is also not a fan of short-sellers especially hedge funds and thus his tweet led to even more internet frenzy.
As a result, the GameStop stock value increased, skyrocketing to $372 per stock. This is what stock traders call short squeeze!
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GameStop Stock Surge
With a short squeeze pulled by WallStreetBets, there was enough increased demand for GameStop stock which now had many short-sellers making short sellers. GameStop’s value surged high and by December 31, 2020, it’s short-sellers were at 260%. Hedge Funds like Melvin Capital got trapped in its game and many sources even said that this Hedge Fund has lost a total of $3 Billion since the Reddit users bought the stocks. Another Short-Seller, Citron Research suffered a 100% loss.
Who Won and Who Lost?
GameStop came finally back in business this month with the help of WallStreetBets and many others who pitched in the buyouts. Short Selling experts and Hedge funds usually deliberately drive companies to loss by taking billion-dollar short stocks. Even to the point to completely collapse a company. A lot of national financial regulators have imposed a ban on short-selling vulnerable stocks.
This might look like a frenzy but if you think about it, the good move by r/WallStreetBets actual saved a failing company! They have now started supporting other companies too, like AMC Entertainment who have become prey of hedge funds.
We hope that this blog on GameStop explained helped you learn about this iconic internet frenzy of 2021 that shook the Wall Street! Drop your views on GameStop and short-selling in the comments below.
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