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The GameStop Fiasco: Could It Change The Face of Investing?

American retailer selling electronics, consoles and games – GameStop – has lately been trending like never before. This is not the result of the company’s success, rather the opposite.

Since the pandemic, GameStop’s shares had in fact decreased by 55 percent. Hedge funds had consequently bet on GameStop to lose a lot of value.

By the end of January, members of a forum called ‘r/wallstreetbetson social media site Reddit changed the rules of the game by suddenly buying shares in the company and raising the demand.

The consequence was the massive increase of share price, from $20 each at the end of December rising to $483.

Financial brokers who had bet billions on GameStop’s dropping value had to buy their shares back to prevent bigger losses. This has added even greater value to the company, because of the rising demand for the stocks.

Elon Musk has also got involved with the GameStop shock. His tweet “Gamestonk‼” gave an extra boost to GameStop’s value. Within a week, the company’s shares ascended by 700 per cent.

Other technology firms, such as BlackBerry, have also seen sharp gains lately, as a result of day traders’ investments after hedge funds had bet against them.

The GameStop shock has been identified as payback from amateur investors who are attempting to take revenge against Wall Street stockbrokers and hedge funds. ‘r/wallstreetbets’ members have indeed argued that they are just playing Wall Street at its own game.

Wall Street investment companies do in fact work on the basis of the shorting process, making money by betting on firms’ share price falls. The hedge fund borrows shares in a company from other investors and sells them, buying them back once the value has dropped. In this way, the hedge fund pockets profits.

The GameStop shock can be considered a fiasco given that a huge number of investors have suffered massive losses as a result of the sale of their shares at a much lower price than the subsequent value they had to pay to purchase the stocks back. Additionally, nobody was expecting this occurrence and could therefore prevent it.

At the moment, the main debate related to GameStop is, however, focused on Robinhood – a platform which is claimed to have been projected to make Wall Street more accessible. Robinhood CEO Vladimir Tenev has been accused of market manipulation after he took the decision of limiting trading in GameStop and other “90s nostalgia stocks”. This has been claimed to be an extortion of the market because small-time investors had started to gain power.

The restrictions on buying and selling of GameStop shares, together with the imbalance has ensued the drop of GameStop value by 90 percent in a week. The company’s current value amounts to around $46 per share.

Reddit rally has subsequently turned to small pharmaceutical businesses, boosting stock by 280 per cent. Thus, we can expect to see this market share flow to increasingly shape Wall Street and a rising number of ordinary people to start investing and gain power within the stock market.

 

[Image credit: pexels.com]

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