It’s not just you. What is happening with the actions of the video game retailer GameStop does not make sense to many people.
The company was going through serious difficulties, but its shares soared in just a few days, in a way wild enough to worry many people in the financial and political elite, from professional investors on Wall Street to in the hallways of regulatory authorities and the White House in Washington.
All of this raised serious questions about whether the stock market is facing a dangerous bubble and whether a new generation of small investors should be allowed to make the most of all the tools available on their phones, regardless of what reckless that may seem to some.
At the same time, proponents of the large majorities are winning stronger from the stands, considering that the powerful hedge funds, Wall Street and the richest 1% are finally getting what they deserve.
Here are some questions and answers about the stock market phenomenon:
What’s going on with GameStop shares?
This month has been crazy. After selling at about $ 18 three Fridays ago, GameStop stock doubled in four days and continued to rise, higher and higher, before nearly doubling on Tuesday and then more than doubling again on Wednesday to 347. close at $ 325.
And how is the company itself?
He is still in trouble and trying to survive. GameStop, based in Grapevine, Texas, sells video games in more than 5,000 stores and the pandemic has kept customers away. More worrying is the long-term change of their customers, who are moving further and further away from physical stores and buying games more and more online.
However, there is some enthusiasm after the company said earlier this month that a co-founder of Chewy – an online pet supply store – was joining its board. Investors see Ryan Cohen as someone who will help transform GameStop into digital sales and physical store closures, but analysts believe the company will still continue to lose money in its next fiscal year.
Is Reddit Involved?
Yes, particularly a group of users of this social network called “WallStreetBets”. Their discussions are full of ideas about the next big mass buyout of stocks, some self-loathing accompanied by pride in their stock bets, both winners and losers, as long as they are bold. Recently, they encouraged each other to keep buying GameStop and take it higher and higher, or “to the Moon”.
Did that only make the shares go up more than 1,000%?
No. A very important reason is the great compassion attacked were the shares of GameStop by hedge funds and other professional investors on Wall Street. Many of them were betting that GameStop shares would fall if they were “sold short.”
What is a short sale?
In a “short sale,” investors borrow a share and sell it, with the expectation of buying it at a much lower price, and so they pocket the difference. GameStop was one of the best-selling stocks on Wall Street.
What is a short squeeze?
It could translate as a strangulation of short positions, which is what happened with GameStop stocks. When a stock is subjected to a wave of buying, its growing scarcity causes it to rise in price drastically, forcing short sellers to get out of their bets early before losing even more. To do this, they have to buy the stocks before they keep going up, but that makes them go up even more, which can create a feedback loop. As GameStop short sellers admitted this month that they were in serious trouble for the heavy losses they were suffering, smaller investors and those just arriving in the markets encouraged each other to keep the shopping party going.
Do these small investors believe in the GameStop business?
There has been controversy about this, but lately small investors behind the buying wave have expressed that they have rather tried to punish short sellers, hedge funds and other large financial firms. Many speak of this in terms of taking revenge on the financial elite, who benefited for years from making profits at the expense of the problems of others.
Buying GameStop shares “is not about greed,” one user wrote on Reddit, after citing all the recessions caused by large institutional investors and the times “they” were bailed out with taxpayer dollars. “It’s about reclaiming what’s ours, what we’ve already paid for,” he wrote.
“This is to get us working on Thanksgiving night until Black Friday in exchange for $ 9.50 an hour,” another user wrote on Reddit.
“The same people who caused the fall of 2007-2008 are now in power and continue to manipulate the market to get even richer. We are simply regaining our share,” one user wrote on Reddit.
“Hello, Mom, I can’t get to dinner,” another user wrote. “I’m with the guys leading the bankruptcy to a 10-digit hedge fund.”
Is it just GameStop that got involved in this?
No. Other stocks strongly subject to short sales have also risen dramatically recently, as there are investors looking for “the next GameStop”. American Airlines, BlackBerry and other previously despised stocks have had extreme price fluctuations this week.
What about the stock market in general?
Critics used to dismiss the GameStop phenomenon and other roles as a side show, saying the case was limited to a few market corners, but the general stock market crash on Wednesday gave rise to caution. Strong losses from short sellers may have pushed them to sell some of their other shares to get cash, and several analysts say this contributed to the 2.6% drop in the S&P 500 on Wednesday. It was the worst market day since October.
Did anyone see him coming?
Maybe not up to this point, but brokers had already made it easier and easier for beginners to enter the market to buy and sell. Commissions have been reduced to zero and people can simply trade through brokerage apps on their phones, such as Robinhood. As traditional barriers to the exchange of shares by beginners fell, consumer advocates applauded the expansion of the playing field, but also warned that it might be too good to be true. Too easy an exchange could encourage new investors to make too many transactions that in the end are too dangerous.
Can regulators do something about it?
The Stock and Securities and Exchange Commission (SEC) has said it has noticed recent volatility in the market and is looking more closely. The SEC’s job is to protect investors, and the expectation on Wall Street is that those who own GameStop shares at these inflated prices will likely be hurt when their price drops, sooner or later.
What sets this case apart is all the communication that exists between a group of users on Reddit, as they incite each other to keep buying GameStop shares, making them go up even more, said Chester Spatt, chief economist at the SEC and Professor of Finance at Tepper College of Business at Carnegie Mellon University. He said it is difficult to consider it as a clear case of market manipulation.
In the end, there may be no way to prevent people from pushing too high an action and potentially getting burned. Instead, Spatt said it might be better to first properly educate all of these novice investors about the risks of bubbles and excessive stock trading.
“A lot of people now feel they’re empowered and they don’t have to go through the traditional actors” of Wall Street to invest, Spatt said. “And to be fair, they didn’t have as much fun with traditional players.”