Some stories become future movies even though they are based on real events, think wolf of wall street and the big short, well the story we are about to bring you may well be one of them. US video games retailer Gamestop is at the centre of this particular story as the everyday person goes head to head with hedge funds and seem to be winning though this bubble may well burst before we know it. We tell you all you need to know about Gamestop.
What is Gamestop?
Gamestop is a US based bricks and mortar video games store which has been struggling particularly as there is an increasing shift to online sales. In fact its struggles were so bad that it had planned to close 450 stores this year. When the store closure announcement was made the stock was trading close to $3.25 last April. However on Tuesday it soared to another 92% and closed at $148 and at one point went as far as $400.
Why did Gamestop shares increase?
Now for those that are smart as all these hedge fund managers are, complex calculations and analysis would have told them that the future looks bleak for Gamestop and unless something outstanding happens like a merger, chances are that the shares would not be worth much, but the stock market doesn’t entirely work like that. It is all about supply and demand and behaviour.
So when a bunch of traders belonging to Reddit message board, WallStreetbets got together they decided to make Gamestop their main stock market focus and started buying as many shares as they could to try to grow the price of the stock at a time when hedge funds had shorted the stock as they thought it would go down and they will profit. In other words the Reddit users had bet against the hedge funds.
Not only did they buy the stock but they encouraged everyday investors often called retail investors to buy the stock too driving up the prices even more.
What are Reddit users angry about?
Reddit users proudly claimed victory as the stock continued to increase promoting it aggressively and pitching it as a battle of regular people versus hedge funds and big Wall Street firms.
One user wrote on Monday;
“We broke it. We broke GameStop’s stock at open,” the user wrote after the NYSE halted trading.
Another user posted;
“This is quite the experience for my first month in the stock market. Holding till infinity.”
Another user said:
“We’re literally more powerful than the big firms right now.”
Some went as far as accusing financial media of backing the Wall street players. In an open letter to CNBC, one Reddit user wrote:
“Your contempt for the retail investor (your audience) is palpable and if you don’t get it together, you’ll lose an entire new generation of investors.”
According to the BBC, the Reddit users smell blood. Analyst Neil Wilson says that, from reading the Reddit chat threads, the day traders' battle with Wall Street is clearly personal.
"Among the many aspects of this story that are strange, what is so unusual is the peculiar vigilante morality of the traders pumping the stock. They seem hell-bent on taking on Wall Street, they seem to hate hedge funds and threads are peppered with insults about 'boomer' money.
"It's a generational fight, redistributive and all about robbing the rich to give to the millennial 'poor'."
Will it end badly?
Many big investors continue to hold their Gamestop stock and believe the tide will turn and the shares will come back down.
"These are not normal times and while the [Reddit] thing is fascinating to watch, I can't help but think that this is unlikely to end well for someone," Deutsche Bank strategist Jim Reid said according to the BBC.
And tears and headaches may well be how it ends. Let’s not forget regulators have the duty to crack down on market manipulation and this may well be an example of exactly that.
Jacob Frenkel, a former lawyer at the Securities and Exchange Commission, the main US financial regulator, said:
"Such volatile trading fuelled by opinions where there appears to be little corporate activity to justify the price movement is exactly what SEC investigations are made of."
Although others take a differing view and think this is just an example of a different way of investing. A fund expert at VanEck claims this is representative of changes and the future direction where individual traders are on the rise.
What happens next in the Gamestop saga waits to be seen, but as is common in the stock market world there are winners and there are losers. Speculative trading is risky and there may well be lessons learnt on both sides once this is over. The movie if one is made may well shed better light into all this.