Back in 2019, GameStop announced that it was closing hundreds of stores nationwide as the need for a brick and mortar video game store started to dwindle. This week, the retail chain is experiencing a boom in stock value, and what makes this unique is that individual investors have somehow bent the market to their will.
There may not be any place on the Internet to avoid news or chatter surrounding the huge gains made by the Grapevine, Texas company. Like many other global entities, GameStop’s earnings and impact within its industry were impacted by the coronavirus pandemic with retail sales slowing to a near halt as digital sales continued to boom.
On Monday (Jan. 26), smaller investors congregating on Reddit and using the Robinhood app resulted in a short squeeze, which in simple terms is when stocks rise rapidly in value which puts traders to buy it back after they put their bets on the stock price falling. As a result, buyers of the stock help boost the price, which aids the actual owners of the stock primarily. In essence, the short squeeze isn’t an effective long-term strategy but can pay dividends.
As noted by Marker‘s Money Talks column via Medium, business writer James Surowiecki gives a far more detailed breakdown of how this all plays out, what implications it will have on the investment community at large, and if the hedge fund model could be turned on its rear.
The r/Wallstreetbets subreddit, which has 2 million subscribers, helped push the idea of this latest so-called “meme stock,” which can be defined as either a value stock or an overpriced stock that rises in value swiftly due to investors essentially creating the frenzy around them for a temporary boost to their earnings.
Overall, hype and FOMO are motivating factors for small-time investors or those newly introducing themselves to the finer points of investing but much can and should be said about the power of social media and gathering spaces that are not the traditional hubs found on Wall Street. This most recent short squeeze event forced hedge fund Melvin Captial to sell of its short position with GameStop after suffering heavy losses.
Looming heavily over this recent gold rush of sorts is the hovering eyes of the Securities Exchange Commission, the federal government watchdog of securities transactions and finance professionals. While the recent boom for GameStop doesn’t appear to be an orchestrated effort, fraud on the part of investors doesn’t seem to be afoot or if there is some wrongdoing, it’d be difficult to prove at the moment.
William Galvin, the Secretary of the Commonwealth of Massachusetts, said in a statement to Barron’s that the trading for GameStop might be “systematically wrong” so it should go without saying that the SEC will be keeping a watchful eye.