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GameStop's Stockmarket Surge

Published on 28 January 2021 at 10:51

For many businesses, the Coronavirus pandemic has been devastating, and has threatened companies with closure. One such company was GameStop. The gaming store had planned to close over 450 stores this year, yet this week, the company’s stock (GME) has skyrocketed.

 

This most recent rise for the 37-year-old chain, is part of a "David and Goliath" battle between an army of unexperienced and relatively new investors, versus those on Wall Street, and seems to have no signs of stopping.

 

Back in April, GameStop announced widespread closure across their chain. At the time Game Stop shares (GME) could be bought at $3.25 each. Compared to this morning where the share price continues to rise, and currently sits at $347.51 a share. This is just short of a 200% increase. The stock continues to grow with small investors continuing to jump on the trend, in the hope that it will ruin the Wall Street bets that this stock will crash. However, this bet so far has been extremely costly to the seasoned Wall Street investors.

 

For GameStop the dizzying heights, that this once falling stock, has now reached is a dream come true. However, where did this sensation originate and is it merely a bubble as pointed out by investor Michael Burry, who in 2008 predicted the housing bubble which subsequently led to the Great Financial Crisis?

 

This recent sensation is not that new, and can be traced back to September when an investor and founding member of the pet food giant “Chewy” – Ryan Cohen, took a 13% stake in the retailer and lobbied for it to increase their online presence and become a serious competitor to Amazon, and was added to the company’s board of Directors this January.

 

The share price began to soar as these amateur investors quickly bought up the cheap stock using the trading app Robinhood and other services including Revolut. Wall Street saw something else however – a chance to “short” or “bet against” a remarkable coup against Amazon.


Shorting a stock comes with its risks. Investors “borrow” a company’s shares and sell them with the intention of buying them back cheaper when the share price eventually falls. Many Wall Street fortunes have been made this way, especially around the Housing bubble. However, as seen in the latter part of the last decade, it can take months, even years for a stock to crash, and so the process of shorting a stock is extremely expensive.

 

As it stands, around 71.66m GameStop shares are currently shorted, which worth about $4.66bn. Those bets have cost investors about $6.12bn, which includes a loss of $2.79bn on Monday (data as of 27th January)


GameStop has been one of the most actively traded stock across trading platforms like Robinhood and Revolut. The violent surge prompted the New York stock exchange to halt trading over nine times.

 

“We broke it. We broke GME [GameStop’s stock market ticker] at open,” proclaimed a Reddit user when the NYSE halted trading
The battle rages on, with some arguing that financial media players are backing Wall Street investors. In an open letter to CNBC, a reddit user wrote “Your contempt for the retail investor (your audience) is palpable and if you don’t get it together, you’ll lose an entire new generation of investors.”


However, some are not so keen about this recent frenzy, fuelled by Reddit users. Lars Skovgaard Andersen, investment strategist at Danske Bank Wealth Management, told the Wall Street Journal that “This is the new day and age in which no one listens to the analysts: ‘Why bother, let’s just go out and buy it ourselves?’” and that “It is a sign of high complacency.”


It is too early to say how long the GameStop saga will continue, or how it will end, but some analysts believe both sides in this skirmish could learn some hard lessons.

 

Many have signalled that Robinhood, the means by which investors are buying shares in GameStop, backs investment strategies that financial planners tend to warn against.

 

Erika Safran of Safran Wealth Advisors stated that “millennials will temporarily be rewarded, and a short-squeeze is definitely conceivable”

 

Safran further added that it is “ironic ... that over decades we [investors] have moved away from an individual stock-picking philosophy to broad stock diversification, and this is the exact opposite,” Safran noted that. “Investing is not just buying one stock.”

 

It seems that this bitter feud, that originated with a falling stock and closing business, which rallied up an army on Reddit to become one of the fasted growing stocks this week, is not over. The established investors on Wall Street are wary of this surge for GME as this bubble will eventually pop. On the other side of the fence, the small investors seem to be adamant about continuing to buy GME shares and further hold out against their Wall Street counterparts.

 

Will this merely be another social media fad that will die over the course of the next few weeks, or will GameStop become the unlikely winner of 2021? What can be said, is there is a distinct similarity between these new investors and someone going all in on the first table they see at a casino – they might win big, but the house always wins.


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