- »Why You’re Seeing GameStop in the News
Why You’re Seeing GameStop in the News
If you’ve been paying attention to the news this week, you’ve probably heard plenty of conversation about the brick-and-mortar video game retailer GameStop. While the company had seemingly been fading in terms of revenues and relevancy, their stock price has shot up nearly 100-fold and the company is now the talk of the town.
What’s going on with this company and why now? Let’s take a closer look at why GameStop has become so important in this particular time in history.
What Happened With GameStop?
Although it’s a bit of a long conversation, we’ll try to explain it in as succinctly as possible.
In the stock market, participants are able to buy a stock (betting on a stock to go up) or short a stock (betting on a stock to go down). A big hedge fund named Melvin Capital decided that they were going to short GameStop as they felt the company was going to go the way of Blockbuster. In other words, they were going to struggle, continue to lose business and eventually close-up shop.
The tricky part comes in is when Melvin Capital decided to short 140% (roughly) of the available stock. Setting aside why it’s even permitted to short more than 100% of a company, just think about it this way: they were essentially doubling down that the stock was going to go to zero. Think of it like wagering on a bet that you love: you place your original bet but as the week progresses, you love that side even more and you come back and bet more. That’s what Melvin Capital did.
The problem is that someone noticed that they shorted more than 100% of the stock. That’s the rub in all of this.
When you buy a stock, you acquire an actual share. However, when you sell, you actually have to borrow the share, then sell it, and then later return it to the person you borrowed it from. That last part is critical. Confusing as that may be, the key is that if you buy a stock, you can hold it for forever and there’s no problem. When you short a stock, since you’re borrowing it, you have to pay interest during the time you’re borrowing it and then later – you are 100% compelled – to return that stock.
So, a Reddit subreddit called WallStreetBets just figured out that if they buy up huge portions of the shares, when Melvin Capital has to return the stock they’ve shorted, they won’t have any stock to buy back and return (to complete the loan). With supply low, that will push the price up – far more than Melvin Capital would like – but at some point, they absolutely have to buy. Those are the rules. If everyone holding shares just holds out together, knowing that Melvin – at some point – has to buy back more than 100% of the stock, they’ll be screwed.
Think of it from a supply and demand perspective at this point. Melvin Capital absolutely has to buy back stock but nobody is willing to sell. The stock was originally $4 but now they have to buy. So, let’s say they offer $10 and nobody sells, then they offer $50 and nobody sells, and then they offer $100 and nobody sells…you start to get the idea. They absolutely have to buy back their shares at some point and the price continues to skyrocket because nobody is willing to sell.
It’s clear they obviously thought that nobody wanted the stock anymore, so they shorted the hell out of it and piled on. They figured that when they were buying it back, they’d be buying it back at $1 and there would be plenty of quantity. Now there is incredible scarcity and the price has shot up.
This is called a short squeeze and while we haven’t seen one like this before, there was one comparable back in 2008 with Volkswagen. The car company’s stock was trading around $100 and a short squeeze pushed it up to $900. The challenge is that even then, there wasn’t 140% of the stock shorted. In this case, there is, so the squeeze could possibly end up being astronomical. Consider that where we are today is roughly 80 times the $4 price it once was and the squeeze – according to many – hasn’t even begun. Fasten your seat belts.
What is WallStreetBets?
WallStreetBets is a group where people gather on Reddit to talk about investments. For the most part, it’s a lot of gambling (hence the name) but the fact that there is a forum like this is great for the little guys. Typically, the hedge funds have better access to information and they do a better job of vetting investments. However, WallStreetBets is now a place where someone can present a case for a stock and the idea gets vetted. If lots of people think it’s a good idea, the post can get upvoted and it can create momentum. Meanwhile, bad ideas can get dropped easily.
For the most part, the retail investors have always been locked out of the market. There was a time when you couldn’t even buy a stock yourself as you had to go through a stock broker. Then there was a time when you could buy yourself, but information about companies and reports was scarce. Then that changed and social media became a thing. And now people can gather, band together and make decisions that can – as we see in this case – outsmart even the shrewdest minds.
The key is that Wall Street has long been doing this. They’ve been colluding, sharing ideas and manipulating the market for decades. Now the little guy is fighting back and Wall Street doesn’t seem to like it.
The other key here is to think of it as an ‘us versus them’. Wall Street mostly scoffs at the individual investor and thinks of them as – for lack of a better word – unsophisticated. In other words, they think they’re so smart while we’re dumb. They’ve long overlooked selling or getting the business of the little guy as they want to cater to teacher’s pensions, city funds and big players. Even now, if you watch CNBC refer to WallStreetBets, they talk about them as just a bunch of bros who don’t know what they’re doing. They’re uneducated, they’re green and they’re going to lose all of their money.
Very few people have stopped to say: “Hey, these guys are pretty smart and the hedge fund got outsmarted. We better be careful going forward.” Instead, what we’ve seen is the hedge funds try to short even more stock, try to exercise more power (complaining to Robinhood, complaining to regulators to stop trading and more) instead of just taking their loss and moving on. In 2008, a lot of small guys had to take the loss and move on – even if it destroyed lives. Now, Wall Street is getting that medicine and they don’t like it.
Nowadays, thanks to apps that make it easy to trade stocks and social media, the retail investor has not only come to play. They’ve gotten in the game. They’ve long been manipulated by the massive hedge funds and when they screw the little guy, nobody helped the moms and pops out. People lost their jobs; companies went under and houses were foreclosed upon. Meanwhile, Wall Street, who was responsible for that crash, faced no punishment or jail time. That’s why now, when the little guy has a chance to stick it to Wall Street, everyone is on board for it.
Sports Bettors Have Long Been Banded Together
WallStreetBets should have chatted with sports bettors because they could have shown them the social ways many years ago. These bettors have long used forums to chat, handicap games, share trends and sports betting ideas. That’s helped bettors save or win money for many years. Moreover, it’s helped teach newbies how to get into the game. Also, how to avoid mistakes and even show them where to bet. Even with cryptocurrencies, which have now become the primary method for depositing into sportsbooks, forums are where players explain their experience and show each other what to do.
With the advent of Twitter, bettors have flocked to the social media network for those conversations. Now they can converse in real time and discuss all of their strategies. They’re connected unlike ever before.
Now it seems like our friends in the stock market have gathered together. In much bigger numbers than any one collection of bettors. And they’re making shrewd decisions as a unit. Wall Street will no longer be laughing or mocking this group. Especially the hedge funds who have taken such a big financial hit as a result of them.