You are not alone. What happens to the stock of video game chain GameStop doesn’t make sense to many people.
The company was in a dire straits, but stock skyrocketed in just a few days, furious enough to worry many in the financial and political elite, from professional investors on Wall Street to the corridors of law enforcement and the White House in Washington. .
All of this raised serious questions about whether the stock market is facing a dangerous bubble and whether a new generation of retail investors should be able to take full advantage of all the tools available on their phones, no matter how reckless they may seem to some.
At the same time, majority supporters are cheering louder from the stands as the mighty hedge funds, Wall Street and the richest 1% are finally getting what they deserve.
Here are some questions and answers about the stock market phenomenon:
What will happen to GameStop shares?
This month was crazy. After selling for about $ 18 three Fridays ago, GameStop’s stock doubled in four days and continued to rise, higher and higher, before nearly doubling on Tuesday and more than doubling again at 347 on Wednesday. On Thursday, it closed at $ 325 .
And how is the company itself?
He is still in trouble and trying to survive. Grapevine, Texas-based GameStop, sells video games in more than 5,000 stores, and the pandemic has kept customers away. More worrying is the long-term change among their customers, who are increasingly moving away from brick-and-mortar stores and increasingly buying games online.
However, there has been some excitement after the company said earlier this month that a co-founder of Chewy – an online pet store – joined the board of directors. Investors see Ryan Cohen as someone who will help GameStop transform into digital sales and brick-and-mortar store closings, but analysts believe the company will still lose money in the next fiscal year.
Is Reddit involved?
Yes, in particular a group of users of that social network called “WallStreetBets”. Their discussions are full of ideas about the next big stock buy, a certain amount of self-hatred accompanied by pride in their stock bets, both winning and losing, as long as they are brave. Recently they encouraged each other to keep buying GameStop and take it higher and higher, or “to the moon.”
Has this caused inventory to increase by more than 1,000%?
No. A very important reason is how deeply GameStop stocks have been attacked by hedge funds and other professional investors on Wall Street. Many of them bet that GameStop stock would fall if they were “shorted”.
What is a Short Sale?
In a “short sale”, investors borrow and sell a stock, expecting to buy it at a much lower price, absorbing the difference. GameStop was one of the best-selling stocks on Wall Street.
What is a short squeeze?
It could be translated as a limitation of short positions, which is what happened with GameStop shares. When a stock is subjected to a buying wave, increasing scarcity causes the price to rise dramatically, forcing short sellers to end their bets early before they lose even more. To do this, they have to buy the stock before they continue to rise, but this will cause them to rise even higher, which can create a feedback loop. As GameStop short sellers admitted this month that they were in serious trouble due to the heavy losses they suffered, smaller investors and new entrants to the markets are encouraging each other to maintain the shopping frenzy.
Do these small investors believe in GameStop companies?
There is controversy about this, but lately the small investors behind the buying behavior have indicated that they prefer to try to punish short sellers, hedge funds and other large financial companies. Many speak of it in terms of retaliating against the financial elite, who for years benefited from making profits at the expense of the problems of others.
Buying GameStop stock “is not about greed,” wrote one Reddit user, after citing all the recessions that caused major institutional investors and the times when “they” were saved with tax money. “It’s about getting back what’s ours, what we’ve already paid for,” he wrote.
“This is to run our Thanksgiving night through Black Friday for $ 9.50 an hour,” another user wrote on Reddit.
“The same people who caused the 2007-2008 crash are now in power and continue to manipulate the market to enrich itself even more. We just got our share back, ”wrote one user on Reddit.
“Hi Mom, I can’t make it to dinner,” wrote another user. “I’m with the guys who let a ten-figure hedge fund go bankrupt.”
Is it just GameStop caught in this?
No. Other high-short stocks have also seen a dramatic rise recently as there are investors looking for “the next GameStop.” American Airlines, BlackBerry and other previously undervalued stocks have seen extreme price swings this week.
What about the stock market in general?
Critics always dismissed the GameStop phenomenon and other newspapers as an afterthought, saying the case was limited to a few corners of the market, but Wednesday’s general stock market crash prompted caution. Sharp losses from short sellers may have prompted them to sell some of their other stocks for cash, and several analysts say this contributed to Wednesday’s 2.6% drop in the S&P 500. It was the worst day on the market since October.
Did anyone see it coming?
Maybe not until now, but brokers had already made it easier for beginners to enter the market to buy and sell. The commissions have been reduced to zero and people can trade easily through brokerage apps on their phones, such as Robinhood. As traditional barriers to beginner stock trading fell away, consumer advocates applauded the growing playing field, but also warned that it may be too good to be true. Too easy a trade could encourage new investors to make many trades that are ultimately too risky.
Can regulators do anything about it?
The Securities and Exchange Commission (SEC) has said it has noticed and is looking into recent market volatility. The SEC’s job is to protect investors, and it is expected on Wall Street that those who hold GameStop stock at these high prices are likely to be hurt if their price falls sooner or later.
What sets this case apart is all the communication that exists between a group of users on Reddit as they urge each other to keep buying GameStop stock, pushing them even higher, said Chester Spatt, former SEC chief economist and Carnegie finance professor. Mellon University Tepper School of Business. He said it is difficult to view it as a clear case of market manipulation.
Ultimately, there may be no way to prevent people from pushing a stock too high and potentially getting burns. Instead, Spatt said it might be best to first properly educate all of these budding investors about the risks of bubbles and stock overselling.
“A lot of people now feel like they are powerful and that they don’t have to go through the traditional players,” on Wall Street to invest, Spatt said. “And to be fair, they didn’t have much fun with the traditional players.”