The beginning of the year has already brought some volatility and uncertainty to the market, with one of the most important events being the rise in GameStop’s stock price. In just one month, GameStop’s stock price rose more than 2,000 percent, bringing its market capitalization to $13.5 billion. At its peak, one share was worth $347 and the number of investors who are looking for where to trade GameStop is rising on a daily basis.
What is GameStop?
GameStop is a chain of stores that sells game consoles, video game discs and movies. The company’s stock price has been falling in the six years prior to 2020 and profits have plummeted, Bloomberg writes: in two years sales fell 40%, to $5.2 billion in 12 months. In addition, the chain is expected to record losses in 2021 and 2022, the source reports.
This has made the gaming company a popular short seller on Wall Street and attracted the attention of large hedge funds.
What happened to GameStop?
The stock’s slow but steady climb began when a Reddit user u/ronoron, a member of the “Wall Street Betting” community, reported that a hedge fund Melvin Capital placed a large short position in GameStop stock. At the moment GameStop was traded at ~$13.
Reddit users were outraged by the fact that the investment fund “got greedy” and “tanked” GameStop, recalling that Melvin Capital made a similar bet that Nintendo stock would fall in 2018. Members of the Reddit community argued that GameStop was undervalued. While hedge funds and other professional fund managers were shorting GameStop stock, betting that the company’s share price would continue to fall, individual investors (online traders, small brokers, etc.), determined to teach Wall Street a lesson, were going in the opposite direction, buying shares and stock options.
The news that co-founder and former CEO Chewy Ryan Cohen had joined GameStop’s board of directors helped the company’s stock to skyrocket. Cohen was hired to help develop the company’s online store.
The outcome
As a result, short sellers realized it wasn’t profitable to hold short positions any longer and paid extra money to buy back the stock, which “further stimulated the growth”, according to the video games retailer.
On January 29th retail traders were temporarily unable to trade GameStop as brokers, including the popular online broker Robinhood, cut funding and restricted trading in some high-profile companies, including Gamestop, leaving traders searching for where to trade GameStop. Individual traders were furious as it meant that they could not purchase the stock and drive the price higher. Nevertheless, Robinhood said some restrictions would be lifted, raising fears of a return of volatility in the future.
What does it mean for the future?
The GameStop incident is a unique event that could change the very nature of how the stock market works. While Wall Street giants continue to dictate the terms of the game for the stock market and they are the ones generating massive profits, the GameStop incident could mean that retail investors take a solid place as a part of the investing world. Retail investors can rally to support other companies, and the results can be completely unpredictable. While currently it is GameStop, it could be any other asset that the online community decides to target in the future.
Meanwhile, GameStop remains extremely volatile and available for both selling and buying on the IQ Option platform. Which side are you on? Will you join the battle or remain aside, as an observer? Now is the time to make up your mind.
