GameStop, a publicly traded specialty retailer, has been in the news lately due to a flurry of activity surrounding a recent spike in the value of company shares. This spike has led to large returns on investment for some shareholders. At the same time, investors who were looking to “short” the stock, are at risk of losing substantial sums of money.
According to Markets Insider, some institutions who had shorted the company, including hedge funds, were looking at losses of around $19 billion on January 29, 2021. Meanwhile, nine people who had invested in GameStop accumulated a collective $16 billion from their stakes. This is because, as of reporting, the value of shares in GameStop has increased by over 1,600% over the past few weeks. An increase like that represents a significant loss for short sellers who were expecting GameStop’s value to decrease. In 2020, GameStop had to close multiple stores down permanently. They also had to endure pandemic-related limitations.
Shorting is the practice of selling stock that was borrowed from someone else. The reasoning some investors might do this is because they suspect the price of a stock will drop, which means, in theory, it is possible to profit by selling borrowed shares because it might be possible to repurchase them when they cost less money before the shares need to be returned to the original holder. When someone decides to short sell a stock, they are taking on risk. To a degree, this is an oversimplification, and concepts like hedging contribute to the complexity, but knowing that some investors were taking on risk to bet against GameStop by selling borrowed stocks helps in understanding the broad strokes of the conflict.
Users of the Reddit forum, Wall Street Bets, which describes itself as “like 4chan found a Bloomberg terminal,” realized that they could work together to increase the price of shares. One user, whose real name is Keith Gill but is commonly known online by his handle, “DeepFuckingValue,” has received some of the credit for the initiative. Gill, whose investment portfolio featured GameStop as its biggest holding, made a case for investing in the company back in July 2019. He has since managed to gain over $20 million from his shares. Redditors who followed suit have also seen considerable profit.
Other investors have benefited from the stock’s activity, too. One such investor is a 10-year-old boy named Jayden Carr, who received 10 shares in GameStop as a Kwanzaa gift from his mother, Nina Carr, to teach him about investing. At the time, GameStop stocks were $6.19 a share. Jayden has since sold his shares for a total of $3,200. He has also invested $1000 back into the market stating “long-term investing is important because that is how I got this money.”
On January 28, 2021, some brokerages restricted trading on the stock. This included the online broker, Robinhood, which removed the ability to buy shares in certain companies while the ability to sell shares remained intact. Later, they implemented a policy that meant clients could only purchase a single share in GameStop. A blog post published to Robinhood’s official website on January 29, 2021 explained their reasoning for establishing some of these restrictions.
At the time of publication, Wall Street has closed for the weekend. Additionally, the U.S. Securities and Exchange Commission has stated that they are looking into the market volatility. Whether or not the volatility will affect regulations going forward remains unclear.