The Gamestop Situation: How beating Wall Street at its own game reveals the fragilities of investing and what this means for the future
Sandrine Jacquot, Online Staff Writer
March 1, 2021
What many news outlets are calling a David and Goliath story, the GameStop stock situation that caused many people to lose considerable amounts of money may mark a turning point for how investors play the market. In January of 2021, Reddit users (Redditors) from the forum WallStreetBets noticed that GameStop, a struggling Brick-and-Mortar video game retailer, was being shorted by many Wall Street hedge fund investors. Reddit is an online platform where users can create subgroups to share content about certain topics. Redditors from the WallStreetBets forum, in hopes of forcing Wall Street investors to abandon their speculation and lose money, purchased the cheap GameStop stocks, driving its price up, while making the Redditors a profit in the process.
Shorting a stock, or short selling, is essentially when investors speculate the decline of a stock’s price. An investor will borrow the stock they think will decline in value, and sell it for its current market price, planning to buy it back in the future for less money. This kind of speculative investing is typically only an advanced strategy undertaken by experienced investors, offering high reward for a correct prediction. However, this strategy comes with a high risk if the investor is wrong and has to buy back the borrowed stock for a much higher price.
The GameStop situation is a short sell gone wrong. GameStop stocks (GME) are the most shorted stocks on Wall Street, as the company has lost $1.6 billion over the last 12 quarters, and GME was falling for six years, until rebounding at the end of 2020. However, big investors who predicted that GME would continue to decline lost a lot of money as Redditors forced the price of GME to increase. Two big Wall Street investors, Andrew Left from Citron Research, and Melvin Capital, took significant losses. It is estimated that major Wall Street investors took over $5 billion in losses from GME and it has not stopped there. Redditors have also driven up stock prices for other heavily shorted stocks such as Macy’s, AMC, and Blackberry.
The stock market is a significant component to the free-market economy. Stock markets are helpful indicators of the health of an economy, as it reflects investor’s confidence for growth, or their fears of a recession. Another important role of the stock market is to help businesses fund their growth. Stocks are, in theory, meant to represent the health of a company: its business model and its potential for future success or failure. However, the GameStop situation presents an exception to this norm, because while it was widely acknowledged by many on Wall Street that GameStop was failing, a select few from Reddit saw potential in the company’s future, convincing other Redditors to buy GME. GameStop is now in a better position to raise capital, reconfigure their board members, and shift their focus to expanding their online market to prevent any further decline. Thus, the stock market is extremely important in bolstering businesses that provide the employment that supports the global free market or capitalist economy.
The uniqueness of the GameStop situation also reiterates just how fragile speculative investing truly is. In such a short amount of time, several shorted stocks jumped several hundred percent in value, and in the instance of GME, increased around 1000% in value in only three months. Such massive increases coincide with a potential for massive downfall. While short squeezes, a term used for when the price of a stock increases and hurts those who bet against it, have happened before, the GameStop situation is unique in nature and intent.
While apps like Robinhood are giving ‘everyday people’ access to stock market investing, this increases the chances of volatile situations like GameStop. Contrarily, if the stock market is only reserved for the already wealthy Wall Street investors, or Bay Street in Canada’s case, then what does that say about our so-called free market economy? There is a general growing frustration about the increasing unequal distribution of wealth, not just in Western countries, but around the world. This frustration is particularly aimed at the wealthiest one percent who are only getting richer, and notably towards the Wall Street elite. It is this frustration over the wealthy benefitting off the stock market that fueled the GameStop situation in the first place. The GameStop situation reinforces that there are no ‘sure things’ when investing in stocks, and throws into question the effectiveness of speculative investing, and whether it really was only designed for the benefit of a few.
With the United States being the world’s largest economy, extreme volatility on Wall Street could have severe, global consequences, as was proved with the global financial crisis of 2008. Financial transactions around the world are occurring more frequently and easily as a result of globalization. The growing interconnectedness of financial markets is favourable when big economies are booming, but when one enters a crisis, it puts pressure on the whole global system, leaving the most vulnerable at risk and to face the consequences.