Everything you need to know about how a Reddit group blew up GameStop’s stock

Who is the monster and who is the hero, in this case, is entirely up to your point of view.

We are now, potentially, at the climax of this movie: GameStop is up over 1,700% since early January. Some trading platforms, including TD Ameritrade and Robinhood, restrict trading on AMC and GameStop. The SEC and the White House both said on Wednesday they were monitoring the situation.

Here is the background you need to know.

Why GameStop?

The popular Reddit page WallStreetBets likes to target short sellers. If you’ve ever played craps, these are the guys who bet against the table, and their tactics, while often lucrative, have tarnished their reputation as leeches and other non-publishable names. (More on that later.)

However, it’s not hard to see why someone would bypass GameStop. The business is expected to lose money this year and next. Sales growth is slow as gamers no longer need to go to the mall to buy games or consoles. That said, some investors have argued that GameStop is seriously undervalued, especially when video games became staples in the pandemic era of the household.

GameStop’s stock spike began for a legitimate reason: The company announced on January 11 that it had added three new directors to its board, including Chewy co-founder Ryan Cohen. Investors have appreciated that Cohen brings a digital experience to the table, something that largely physical GameStop desperately needs, as video games go digital and malls continue their endless collapse into uselessness.

GameStop action increased just under 13% that day. But this was not a normal, momentary increase in actions. Two days later, it increased by 57%. Then 27%. The following week, it jumped 10% twice and 51% on another day. This week, it increased again by 18% then 93% and has more than doubled today.

The reason is twofold, with both being far removed from anything to do with the fundamental strength of the company: Investors following the Reddit group bought a ton of GameStop options, and short sellers had to buy stocks to cover. their losing deals.

On Wednesday, as all three major stock indexes fell, GameStop finished at a staggering 134%.

For the prospect: A year ago, a single action cost around $ 4. It is now $ 200.

Not just GameStop

A similar story was playing out with the actions of AMC, the chain of cinemas devastated by the pandemic.

Shares of new toy WSB were on the rise more than 200% Wednesday after Reddit board members and Robinhood investors touted the action. The #SaveAMC hashtag was all the rage on Twitter.

AMC and GameStop both rose so rapidly on Wednesday that they triggered automatic shutdowns designed to protect against volatility.

Why is this happening now?

The way people trade stocks has been shaken by the rise of free apps like Robinhood. This technology has democratized investing, giving armchair investors away from traditional banks free access to sophisticated trading instruments, like options.

You can pay an analyst to tell you which stocks to buy, or you can create a Reddit account and follow forums like WallStreetBets. Millions of young people are opting for the latter, which is part of why the sudden increases in GameStop and AMC surprised Wall Street veterans.

What is an option?

Options are bets that investors place on a stock, allowing them to buy (a “call” option) or sell (a “put” option) at a particular price. This allows people to bet on the rise or fall of a stock.

Investors can place relatively inexpensive option bets and sell these options as they increase in value as the stock price approaches their bet. While buying and selling options is not the same as buying and selling stocks, large volumes of options can drive a stock up or down, usually because options traders buy or sell the stock. itself as a cover.

In the case of GameStop and other stocks targeted by WSB, traders continue to buy options, forcing investors who sell those options to hedge their bets by buying GameStop stocks.

What is a short film?

Short sellers are investors who bet that a stock will fall. They borrow shares to resell them on the market with the promise to buy back those shares at a later date. If they win the bet, they sell high and buy low, and they walk away with money in the bank.

If they lose the bet, it’s called a short-squeeze, and they often cover their losses by buying more shares of the company they bet against.

Short-term interest in GameStop increased towards the end of the year, with investors betting against the company’s profit potential. With a mega short-squeeze, the short sellers began to hedge their bets, buying more stocks to offset their growing losses.

Fuel the fire

WallStreetBets, which has over 2 million subscribers, is littered with posts encouraging stock market gains and great fair outrage.

“What is happening, I think, is that you have such an impact that these big cats are afraid of having to get up and work for a living,” a moderator of the group said. posted this week“This fuzzy feeling that you feel is called RESPECT and it is well deserved. Wall Street is no longer rejecting your presence.”
Elon Musk's tweet fuels GameStop's frenetic wave
Elon musk seemed to join the heap-on Tuesday with a one word tweet – “Gamestonk !!” – the one linked to WallStreetBets. Tech investor Chamath Palihapitiya plunged his toe into the frenzy, buying call options on Tuesday but closing his position on Wednesday, he told CNBC. Palihapitiya has said he will donate his profits to charity and has championed the phenomenon of retail investing happening on Reddit.

“Instead of having ‘idea dinners’ or whispered conversations among hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum,” he said. “What this proves is that this retail business [investor] phenomenon is here to stay. “

Isn’t that a bubble?

Absolutely.

There is an argument that GameStop was undervalued, but hardly anyone believes that GameStop, BlackBerry, Macy’s, AMC or any of the other companies promoted by WSB have fundamentals to support these rising stock prices. At some point, reality has to set in.

But that’s the problem with bubbles – get out too early and you lose a chance to cash in on that. So GameStop continues to skyrocket … until it isn’t.

The GameStop saga is a battle between the new school versus the old school, the amateur versus the professional, the rebels versus the establishment.

Right now the kids are winning. But, like all bubbles, this one will burst at some point.

– David Goldman and Paul R. La Monica of CNN Business contributed to this report.

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Pia Miller

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