GameStop: Why social media-driven traders are beating Wall Street

An unlikely company has found itself at the centre of a much-heralded sea change in investment trends, as video game retailer GameStop’s stock continues to skyrocket – at least for now.

But the bizarre spectacle around the surge in the US consumer electronics firm’s share price has become a war of words – and dollars – between traditional Wall Street barons and small-time retail investors catalysed by social-media buzz.

Virtually overnight, the value of GameStop went from extraordinarily low to breathtakingly high. The coronavirus pandemic had slammed the Texas-based chain with more than 5,500 retail locations. Struggling to shift from brick-and-mortar stores to an online seller, the company was shuttering many of its mall shops.

Yet now, the gaming merchandiser is taking a victory lap, just as other companies have also seen their fortunes brought back to life by so-called “Reddit rich” rookies exchanging free stock tips on the social media site.

What is the background here?

In April 2020, Gamestop announced plans to close 450 stores. Its stock dipped to below $3 per share. The stock then slowly recovered by the end of the northern hemisphere summer and in September, investor Ryan Cohen rallied around the retailer, pressing for the company to take on Amazon.com Inc.

Cohen snatched up a 13 percent stake in GameStop and along with two partners, jumped onto the company’s board. That was when the firm’s cult-like status began to emerge.

How much is GameStop now worth?

By mid-January, the stock had surpassed $30 per share. But the momentum did not stop there. During the past week, its value has catapulted past $300 per share, reaching a peak of $373 on Wednesday morning in New York.

The stock’s surge has created $2bn in personal wealth for the firm’s three largest individual shareholders, including Cohen – none of whom appear to have sold their shares yet.

Why are heads turning?

Small-time investors purchased what they saw as undervalued GameStop stock using the Robinhood mobile app and other new trading services that aim to democratise market access. At the same time, a number of big Wall Street financial players bet against GameStop and shorted the stock.

So please explain to me what shorting a stock is

This is a strategy in which investors borrow shares they do not own and then sell them on the expectation that their price will fall. They then buy those shares back – something known as “covering” – once their price drops and hand the shares back to the party they borrowed them from in the first place.

More than 70 million GameStop shares are currently being shorted, resulting in losses for large institutional investors amounting to an estimated $6bn.

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