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Not quite Game Over for GameStop? Stock value almost quadrupled last night

GameStop’s chief financial officer Jim Bell announced this week that he would resign on 26 March.

Image: Shutterstock/ThomasAFink

GAMESTOP STOCK VALUE almost quadrupled last night. This comes after the announcement on Tuesday that their chief financial officer, Jim Bell, would resign on 26 March.

Just before the New York Stock Exchange closed last night at 9pm Irish time, value began to skyrocket. The price peaked at $185 a share. Earlier that day it had been $46.

When trading reopened today the value has hovered around $140. This still represents an increase of almost 200% to the day previously.

The popular internet forum Reddit, which sparked the initial value surge last month, temporarily shut down as people all over the globe went to check what was happening.

The reason behind yesterday’s rapid price surge has not yet been confirmed. Amateur investors on Reddit have continued to invest in GameStop since the value exploded last month with the goal of bringing about another short squeeze.

Other stocks which became popular to trade on the internet forum also saw price surges
yesterday. AMC Entertainment gained 18% and Blackberry value increased by nearly 9%.

GameStop was the reason behind a recent congressional hearing between amateur investors against hedge funds. In this hearing, hedge fund CEO Vlad Tenev denied any role played by hedge funds in disabling buying of GameStop stock through popular trading apps.

Joseph Kopecky, Assistant Professor of Economics at Trinity College Dublin, says “the danger is that gamifying these things is a dangerous way for people to play with their savings”.

When it came to the original price surge, he says there was “no way it was sustainable for
Redditors to keep (the price) that high” and that it was “herding behaviour. They were all
following each other and it got out of hand”.

GameStop was part of a short squeeze last month that saw value increase by over 2000% in a few weeks. Value went from $18 a share on 8 January to a peak of $396 on the 28th of the same month.

However, on 2 February value dropped by over 60%. Since then the stock value has been hovering at around $43 dollars a share.

The Reddit thread ‘r/WallStreetBets’ consists of millions of community members. This group recognised that if enough people invested in a company being shorted, they could make money.

This would be done by inflating the price through investing and taking the profits from those shorting. During the original GameStop hype there were 800’000 posts a day on the page.

Scrolling through r/WallStreetBets over the last few weeks, you saw posts telling others to hold or keep investing in GameStop stock because the price will rebound. Today, those who held on to stocks despite the value plummeting have now seen tremendous gains.

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Shorting is done by borrowing stocks from a company, waiting for the price to drop, and then returning the stock and keeping the profit. For example, if a hedge-fund borrowed one thousand shares valued at €1,000, then waited until the same amount of shares were now worth €800, they can return the borrowed shares and keep the difference of €200. This would mean they had successfully shorted the company.

After millions invested into GameStop and inflated the price, the hedge-funds would have to return stocks at a higher price than they had borrowed them. This time the difference would go to the new investors. Economists call this a “short squeeze”.

Melvin Capital, the hedge-fund who faced the brunt of the short squeeze, lost billions.

Their company’s value dropped by 53% in January. However, they received an emergency cash injection of $2.75 billion from two other hedge-funds, $750 million from ‘Cohen Point72 Asset Management’ and $2 billion from ‘Ken Griffin’s Citadel’. Amateur investors who lost money had lost it for good.

Over the last few years GameStop stock value has been declining as the value of a retail game store decreases. An increasing number of people choose instead to download games. This is visible after PlayStation’s announcement to create a ‘Netflix for gaming’ last year. Therefore it was a fair for hedge-funds to assume the price would continue to decline, allowing them to profit through shorting.

The trend towards the gamification of stock trading and investing makes people have the sense that there is easy, free money to be made. A lot of these people perhaps can’t afford to be squandering away their savings.

About the author:

David O'Sullivan

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