The GameStop Story: An Analysis

Seema Banerjee Seema Banerjee
Feb 4, 2021 11 min read
The GameStop Story: An Analysis

The corporate world epitomizes the classic Tom and Jerry cartoon for me. Everyone is chasing someone and then the bigger Dog comes to take the prize away. The story is especially similar in the stock market, and it scripts the rise and fall of many major companies.

The A-Z List Of Stock Marketing Apps
A stock market is a trading place where you can trade shares of the companies.you can buy or sell a stock by people only if you can list it on an exchange.Hence, it is refer to as the meeting place of the stock buyers and sellers. Nowadays, it is very essential for you to stay updated with every…

There is always history being created with the buying and selling of shares. The recent battle between modern-day online investors and multimillion-dollar hedge funds came to light with GameStop. Let us delve into this bizarre tale.

What is GameStop?
What is Reddit?
How is Reddit related to GameStop?
The technical Terms
What happened: The story detail
The Aftermath
The Significance of the GameStop Rally
The moral of the story
Finally, What did Elon Musk do?

What is GameStop?

What is GameStop?

GameStop was officially born in 2000 while tracing its roots to Babbage’s Etc. founded in 1984. GameStop Corp. operates retail outlets specializing in selling video games. Electricals and gaming related merchandise.  The company is headquartered near Dallas, Texas USA.

GameStop Success Story | Startup Story | Business Model | Revenue Model
Company Profile is an initiative by StartupTalky to publish verified informationon different startups and organizations. The content in this post has beenapproved by the organization it is based on. Children love playing video games. In today’s date, not only the children butalso the adults crav…

GameStop has the honor of being the largest video games retailer having shops across United States, Canada, Australia, New Zealand, and Europe. It was a successful business model, however with the advent of the online storefront and some failed investments, its fortunes have somewhat declined in the last decade. Also, it hasn’t been doing very well in the pandemic either.

So what happened that its share price skyrocketed?  Well, that is the story.

However, we need to understand a bit more about the related parties that played major roles.

What is Reddit?

Steve Huffman- The Co-Founder of Reddit
Steve Huffman is the co-founder of Reddit along with Alexis Ohanian (his collegeroommate). He started programming/coding since the age of 8. His net worth as of2020 is about $5 million. Read ahead to know more about him. Steve Huffman- BiographyNameSteve HuffmanDOBNovember 12, 1983(36)Nationali…

Are you on Social Media? Like Facebook or Twitter, well Reddit is also a social platform where users post content. This is then upvoted or downvoted and rankings happen. You can create your own community to discuss or share things that you like, for example, football, technology, or anything specific.

Any discussion or post also feeds into the main section of Reddit. So, in simplest terms, it is like a giant forum, divided into many sub-forums. Around 500 million people visit the site every month. It lives up to its motto “Front page of the internet” and is the sixth most commonly visited site on the internet.

How is Reddit related to GameStop?

Reddit and GameStop relationship

The important link in this story is a forum on Reddit called wallstreetbets. This community had more than four million members focused on discussing the share market, stock, shares, and investment.

It was this community that decided to challenge the big investing Hedge funds to create a short squeeze.

Getting too technical? Let us make it simple.

We know GameStop was not thriving and with the pandemic, people were more inclined to

do shopping online, so the position of GameStop was not great. The large traders in the stock market do betting on the performance of such companies doing well or failing. They then borrow shares in these companies and sell them promising to buy these back later. The premise here is that they would be able to buy back at a lower rate and return it to the owner. The investor (hedge Fund) would end up pocketing the difference as profit.

This would have been the case with GameStop if wallstreetbets had decided not to intervene.

The technical Terms

Let us learn the technical terms first and then discuss more details.

Hedge Funds: Hedge Funds are non-traditional or alternative investments using funds in one portfolio collected from different investors, (Pooled funds) that employ different strategies to earn a profit. They are aggressively managed to have leverage in domestic and international markets to earn high returns. The access is usually for accredited investors only as they are less regulated.

Top List of Indian Venture Capital Firms and investors to fund the startups
Some of the businesses are to make predictions, which is tougher than you canthink. There is a trend to spot a pattern and predict future functionalities andsuccess. The job of the Venture Capital (VC) executives is to spot the trend andinvest in aspiring and growing startups. For example, Flip…

Short Selling: Short Selling is a way of profiting when the value of an asset i.e., Gold, Silver, Oil, or shares falls. A short Seller (mainly big investors) borrows stocks or assets from the owner for a token fee. Then, the seller sells it at market price with a promise to buy these back later. The short seller intends to buy it back later assuming these will fall in price. So, they will have to pay a smaller amount. Once bought, it is then returned to the original owner and the seller would have made a profit or loss depending on the value in the market.

Weird and Creative Ways To Make Money With Zero Investment in 2020
There’s a common saying that goes, “Money doesn’t grow on trees”. The world isharsh and everything has to be earned. To survive you need money, and to getaccess to money you need to work. But finding work is just too hard or evenharder than working in today’s world. It would no longer be a surpri…

Short Squeeze: A short squeeze occurs when the price of a stock increases unexpectedly especially when sellers expect it to drop. Thus, they have speculated against it and this forces the traders to buy back at a higher price to avoid losses. But this only creates upward pressure on the price, squeezing it even higher.

What happened: The story detail

GameStop was one of the companies that were expected not to perform well and many hedge funds had speculated upon this happening. The share price hit lows of $2.57 in 2020, rising only to about $18.84 by 31st December 2020 as large hedge funds backed the company.

However, there were many including Melvin Capital, Point72, D1 Capital Partners that were short-selling GameStop anticipating it not to perform well and lose a lot of value.

At this juncture, a flurry on amateur investors from the Wallstreetbet forum on Reddit called for people to stockpile these shares. And these small-time investors used their spare cash to buy GameStop shares. Thus, pushing the prices up, more than 1500% at one point, they put the value of the company in Fortune 500 List. The share price reached a high of $350 by 27th January.

Robinhood down to one star on Google Play store: Here’s why
Robinhood, a popular trading and investment app is receiving significantbacklash from its users lately. So much so that its ratings on the Google Play[/tag/google-play-store/] store has plummeted to one star. The reason for Robinhood’s sudden decline comes after its decision to placerestrictions…

This created a short squeeze in the market causing a loss of billions to Hedge Funds that had bet against GameStop. They had to buy back the shares, creating additional demand and pushing the price even higher. By Friday, hedge funds and other short sellers had made an estimated loss of $19 billion.

Not only this but other companies lagging in a performance like MC Entertainment, Koss Corp and BlackBerry, also saw sharp gains in their share prices. They were bolstered by day traders as larger investors bet against them.

The Aftermath

After the unexpected surge in trading of GameStop shares, many trading platforms like Robinhood and interactive brokers curbed the buying and selling of the US Games firm stocks and other similar stocks. These restrictions caused prices to go down by around 55%. This has caused the small investors to be disgruntled by limitations.

The Significance of the GameStop Rally

Short Selling is a common phenomenon in the share market. It is usually big funds and investors fighting over the future of a company. This was probably the first-time small investors have taken the battle to the doorstep.

This single act demonstrates the power of social media and an organized approach. There is free data available easily and it can be transmitted via social media. A united organized and planned approach by small investors was the cause of major losses to bigger fish in the market.

For the Reddit forum, it is being touted as their attempt to break teach a lesson to the large investors. A section of the masses states the aim was to create losses for stockbrokers and hedge funds. Many Reddit users are pointing this to be revenge for creating a financial crisis in yesteryears.

It is very important to remember that these small investors may end up losing funds as the price of GameStop starts downhill, which has already started.

The moral of the story

GameStop’s turbulent journey is a clear show of power that organizing and planning via social media can have and its significant reach among people.  It may make the large investing houses think again about betting against a company.

Andrew Left, head of Citron Research admitted after the GameStop fiasco that there would be a change in how hedge funds and short-selling operate as his company made losses in this deal.

Shopify Inc. | E-Commerce | Company Profile |
Company Profile is an initiative by StartupTalky to publish verified informationon different startups and organizations. The content in this post has beenapproved by the organization it is based on. E-commerce has become mainstream in people’s daily lives with profound benefits.Shopify Inc. is a…

The concept of buying and selling stock was a niche to brokers for a long time. However, Share-dealing apps like Robinhood and easy access to information online about companies and trading strategies have opened the field for ordinary small-time investors as well. And They are a force that has to be reckoned with.

This also raises serious questions about the ethics, morality, and legality of collusion among investors to push prices up. While many people were happy seeing the downfall of giants, we have to remember that short term trading is a reality, whether done by small or big investor. Every penny gained by someone is at the cost of loss to someone.

Zerodha Story - Founders | Revenue | Competitors | Business Model | Profit
Company Profile is an initiative by StartupTalky to publish verified informationon different startups and organizations. The content in this post has beenapproved by the organization it is based on. The boom of the stock market has been sky-rocketing since the 200o’s. Imagine aplayer coming in a…

Institutional investors have to be more aware of the mood of the small investor and will have to put in a lot more research into opinions expressed in the forums. Like one short-seller burned by GameStop deal has decided to stop short selling and instead invest in companies with potential for growth rather than bet against them.

Social Media has emerged as a new influence that can cause massive surges in the market, especially posts by influencers. However, critics warn that one would be wise not to follow these advisories blindly. There is a conflict of interest rife within the investment houses and the expert opinion usually are aligned to one of the companies.

There has been a surge in amateur investing during the pandemic as people were stuck at home and had time on their hands. They poured time and money into learning more about investing. This has a rippling effect as they trade in stocks and risks without understanding them fully.

The availability of apps for trading is another grave factor to be considered. While the savvy investor can earn a profit, but inexperienced and ill-informed investors may not only lose funds but also will not be protected by any legislation or law.

Savart Success Story: Wealth Creation Is Not Difficult | CEO | Networth | Turnover
Company Profile is an initiative by StartupTalky to publish verified informationon different startups and organizations. The content in this post has beenapproved by the organization it is based on. Everyone yearns to make money and get rich. But, you simply cannot becomewealthy with that increa…

Similarly, hedge funds are also less regulated than other funds like mutual funds. The aggressive strategies used by them are not always completely transparent. GameStop incident was seen as a public way to punish the perpetrators of morally dubious practices. There is a clear need for more stringent rules to curb such trading practices.

Finally, What did Elon Musk do?

Elon Musk: The Story of The Richest Man In The World
Today when we talk about the world’s most influential and riches entrepreneur,Elon Musk comes to our minds for sure. He has always been in the news let it behis new venture, his way of working or his net worth. Elon Musk’s tweets catch the attention from masses; be it Elon Musk naming hisbaby X…

The Tesla Boss enjoys tweeting and has been known to feud with short-sellers. And when he decides to tweet everyone takes notice. He threw in his gauntlet in the fray saying “Here come the shorty apologists. Give them no respect. Get shorty” and another on Tuesday “Gamestonk!!” was enough to send the price up again.

Side Projects of Elon Musk
The South African-born American entrepreneur [/tag/entrepreneur/] Elon Musk,(born June 28, 1971 in Pretoria, South Africa) cofounds PayPal as an electronic payment [/tag/payment/] firm, and creates SpaceX, the launch vegetable andspacecraft manufacturer. He has also been one of the first major in…

The best part? He has links with the forum on Reddit and is affectionately called Papa Musk!

Subscribe to Startup Talky

Get the latest posts delivered to you right in your inbox

Great! Next, complete checkout for full access to StartupTalky.
Welcome back! You've successfully signed in.
You've successfully subscribed to StartupTalky.
Success! Your account is fully activated, you now have access to all content.
Success! Your billing info has been updated.
Your billing was not updated.