Friday, May 14, 2021

GameStop: Why Social Media-Driven Traders Beat Wall Street | Financial market news

Must read


An unlikely company has found itself at the center of a radical shift in investment trends, as the stock of video game retailer GameStop continues to soar – at least for now.

But the bizarre spectacle around the soaring US consumer electronics firm’s share price has turned into a war of words – and dollars – between mainstream Wall Street barons and small retail investors catalyzed by the social media buzz.

Almost overnight, GameStop’s value went from extraordinarily low to unbelievably high. The coronavirus pandemic had slammed the Texas-based chain with more than 5,500 retail outlets. Struggling to move from physical stores to an online seller, the company was closing several of its stores in malls.

Yet now the game merchandiser is taking a winning turn, just as other companies have also seen their fortunes come back to life with so-called “Reddit rich” recruits trading free advice on the social media site.

What is the context here?

In April 2020, Gamestop announced plans to close 450 stores. Its stock fell below $ 3 per share. The stock then slowly recovered in late summer in the Northern Hemisphere and in September investor Ryan Cohen rallied around the retailer, urging the company to take on Amazon.com Inc.

Cohen took a 13% stake in GameStop and, along with two partners, jumped onto the company’s board. It was then that the cult status of the company began to emerge.

How much is GameStop worth now?

By mid-January, the stock had passed $ 30 per share. But the momentum didn’t stop there. Over the past week, its value has catapulted over $ 300 a share, hitting a high of $ 373 on Wednesday morning in New York City.

[Bloomberg]

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

Why are heads turning?

Small investors bought what they saw as undervalued GameStop stocks using the Robinhood mobile app and other new trading services that aim to democratize market access. At the same time, a number of major Wall Street financial players have bet against GameStop and have sold the title.

So please explain to me what short selling a stock is

This is a strategy in which investors borrow stocks they don’t own and then sell them in the hope that their price will drop. They then buy back those shares – called a “hedge” – once their price drops and hand the shares back to the party from whom they borrowed them in the first place. This is essentially the reverse of how an investor would normally try to make money: buy a stock when it is low and sell it when it is rising.

Over 70 million GameStop shares are currently sold, resulting in losses for large institutional investors estimated at $ 6 billion.

Do experts call a “short squeeze”?

Yes, a short squeeze occurs when a stock’s price goes up rapidly – not necessarily because of the underlying fundamentals – but because of short sellers hedging and liquidating their positions.

With GameStop, it started on January 22 and continued this week.

What does this say about the power of Reddit?

On Monday, Reddit users were saying they “broke GME,” referring to the ticker symbol for GameStop. Trading in its stock was temporarily halted by the New York Stock Exchange nine times to contain volatility, after the stock doubled in less than two hours. Many millennials in the WallStreetBets forum are celebrating their power over the titans of Wall Street.

Legions of Reddit-inspired stock pickers and a stampede of TikTok-addicted day traders clashed with established investors who doubled their opposing bet, in a financial war of attrition. Investors supporting GameStop have promoted the showdown as a battle royale between everyday bettors and powerful hedge funds.

The social news aggregation site Reddit has become a platform for forums like WallStreetBets, which has allowed retail traders to beat much larger investment firms. [File: Bloomberg]

Can seasoned investors still win their bet?

One mainstream investor, Citron Research, continues to label GameStop a “failure” and denigrates supporters as “herd investors” artificially inflating the value of the stock. But that company has stopped shorting stocks, apparently following online harassment from GameStop fans.

Melvin Capital Management, another established player, saw its assets drop 30% as short positions – including those of GameStop – failed. But the hedge fund has nevertheless been bailed out in recent days by other funds such as Point72 Asset Management and Citadel LLC. Melvin closed his short position – in other words, he bought back the stocks he had borrowed – in GameStop on Tuesday, as GameStop became the most traded stock in the United States.

Many in the mainstream financial media have sided with seasoned investors, while some analysts condemn the market frenzy as a stubborn sign of manic trading. While short sellers may eventually be forced to fold, skeptics say the stock will eventually revert to valuation consistent with market fundamentals. Either way, price movements could take months to reach some sort of equilibrium.

What other titles are positioned in the same way?

The same Reddit community orchestrated this type of maneuver with a few other heavily bypassed actions such as AMC Entertainment, Eastman Kodak, Bed Bath & Beyond, and the liquidation company of video rental company Blockbuster. As a result, AMC was saved from impending bankruptcy due to a pandemic.

All of these businesses have faced financial ruin – in large part due to economic forces beyond their control, in industries as diverse as in-person movie viewing, big box retail and VHS movie rentals. . Electronics company BlackBerry Ltd and fashion retailer Express Inc have also seen short pressure in recent days. Strong increases in their shares have taken place in the face of bets placed against these ailing companies struggling for solvency.

Theater company AMC Entertainment was rescued from impending pandemic bankruptcy following recent stock price surge [File: Carlo Allegri/Reuters]

But is this fervor creating a market bubble?

Selecting hot individual stocks to buy and sell quickly goes against the long-term strategy of diversifying risk in one’s portfolio that most financial planners advocate. Retail trading platforms TD Ameritrade and Schwab have already restricted trading from GameStop and AMC, as government regulators consider their options to limit the potential for large losses to the downside.

Some market watchers believe a speculative bubble akin to the dot-com boom – and subsequent slump – of 2000-2001 is being driven by players like WallStreetBets, while other investors suggest that many of these companies newly rescued were seriously dumped and due for a return.



- Advertisement -spot_img

More articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisement -spot_img

Latest article