Just when the world had anticipated the inauguration of the 46th American president, something unusual rocked the stock market and Wall Street. The resurgence of GameStop – A dying American company whose stocks aroused a battle between some members of the Reddit community and Wallstreetbets.
Founded in 1999, GameStop, an American video game retail store boasts over 5500 retail stores. Recognized as the largest video gaming retail store in the world. Between 2004 – 2016, the company enjoyed successes when it expanded its chain of business by investing and purchasing non-gaming businesses.
Then, there came a change. A swift shift in the mode of operations of the gaming sector. The market for the physical need for video games drastically reduced. Sales became more digital than in-store. Competitors such as Xbox Live, PlayStation Network, Nintendo eShop came on board offering ease of access for acquiring video games.
They made video games downloaded thus making gamers order video games online rather than arriving in-store to purchase them.
And, this was the start of a major decline of the world’s largest video game retailer, GameStop. As at 2016, GameStop had reported a 16.4% drop in sales during the holiday season which ultimately affected its stocks by a 16% decrease in 2016.
In 2017, stocks reduced a further 8% and the company announced it would shut down 150 stores to focus on its non-gaming businesses. By June, the following year, there were talks of a possible sale. Sycamore Partners, a private equity firm in New York was rumoured to be the favourite for the buy. However, in January 2019, GameStop ended talks for a sale. It announced that its new goal was seeking alternate healthy actions that would restore the company back to the top.
Surprisingly, what would have been a statement of rebirth led to a further low. As a result, GameStop stocks dropped massively by 27% to a 14-year low. By February 2, 2019, (the end of its 2018 financial year), the company had experienced the biggest loss in the company’s history. A record-breaking net loss of $673 million.
Also read – Prop Trading Guide for Beginners (Pros & Cons)
The Pandemic Hit
In 2020, COVID-19 pandemic hit economies all over the world. As a plan to manage and reduce the spread of the virus, Trump led the government enforced a stay-at-home order. This move further worsened GameStop’s crisis since it needed the physical presence of people to purchase games in-store. While retail sales reduced by over 30%, digital sales grew by 519%.
The Saga – Reddit vs Wallstreet– How it started
In August 2020, GameStop disclosed that Ryan Cohen, a co-founder of Chewy (an online store for puppies) had acquired a major share in the company. And by January 2021, GameStop named Cohen and two other former Chewy executives to its executive board.
Having a history of success in e-commerce, Cohen was charged with the responsibility of restoring GameStop to the top as the end. How? By focusing more on digital sales, mobile gaming, and esports. The addition of Cohen signalled hope for greener times to come for the dying company. It was enough to skyrocket the stock price of GameStop.
By this, short-sellers who had given up on the company were forced to cover their positions and buy more GameStop’s stocks.
You might be wondering what it means to short sell. Let me explain in details;
Short Selling – What does it mean?
When an individual buys a company’s stocks, he hopes that things will turn good and stir up the firm’s stock price. Percentage growth of the company means an increase in its share price which automatically means more money as a shareholder.
However, if things become sour and the company experiences a decline, he can borrow some shares from the company, sell them with the hope it would further reduce in price, buy them back when it has reduced in price, return to the company then pocket the difference as your gain.
This is called the short-selling of stocks.
Take for Instance;
Alex borrows one share from a declining company worth $20, with an agreement to return in 30 days. He believes the price will eventually reduce before the 30 days period, so he sells it for the same $20. As predicted, the company’s share eventually reduces to $5 during those 30 days.
Alex then purchases the share for $5, thereby closing his position. He returns the share borrowed as agreed which is now worth $5 and pockets the profit difference of $15.
But, if eventually Alex’s prediction goes wrong and the company share increases to $30, he abandons his position and returns the borrowed share now worth $30. Alex then loses $10 plus possible transaction fees.
What exactly happened?
Having said that, this was exactly what transpired between Hedge fund short-sellers and some group of Reddit users. A year ago, GameStop had sold its stock for about $4. This made a group of hedge fund managers on Wall Street predict the eventual end of the company. For them, it was an opportunity to curb enough profits by short-selling GameStop’s shares.
By January 21-26, some Reddit users intervened to help save up the dying company from being exploited by these Wall Street short-sellers. Together, they bought the company’s stocks at an immerse rate, causing the price of GameStop shares to rise by 244%.
By January 27, the price increase forced short sellers to abandon their positions and lose billions of dollars in the process. Their prediction had played against them and this move further increased GameStop’s stock price to a further 135%.
Price and Current Position
Thanks to the Reddit community for turning the fortunes of a dying GameStop from oppressing short sellers on wall street. The online community users (Reddit) influenced the stock prices of GameStop from $20 to over $300 within days.
Soon, the rise prompted Robinhood (An American company offering free financial services) to restrict individuals from buying GameStop stocks. Traders were only allowed to close out their current positions for their stock but couldn’t buy anymore.
The Reddit users cited foul play by Robinhood’s actions because it allowed hedge fund traders to keep trading. As a result, forcing the new Biden administration to investigate the decision.
Paper trading to the rescue
After these manipulations, and restrictions by stock game players, paper trading would be just the best option for traders. To ease the tension and plan future trading moves and possible stock investment.
But then, what is Paper Trading?
In simple words, it is a virtual form of trading. A risk-free platform that gives investors an avenue to trade in securities rather than real money. It enables you to practice and prepares, to know which stock would be favorable before investing real money. Here, you don’t lose real money, rather it helps you gain more experience and understand the market.