The GameStop EffectThe GameStop Effect https://i1.wp.com/soaltech.com/wp-content/uploads/2021/02/7724F6E2-B99D-4455-A522-4EC5EEC26874.jpeg?fit=763%2C509&ssl=1 763 509 soaltechadmin soaltechadmin https://secure.gravatar.com/avatar/6eec4427dd031e16c8da4c63019a7497?s=96&d=mm&r=g
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GameStop among other companies such as Nokia, Blackberry, and AMC to name a few are having massive price fluctuations in the stock market which is due to the attention being brought about by a large group of Redditors working together to cripple various hedge funds for over asserting their power on the market.
So what really happened? To understand, you have to know what a short-sell is. In a short-sell, the investor borrows a stock under the assumption that the price will fall drastically at a later time and sells it at its’ current price. After the price drops (which isn’t always the case), the investor repurchases those stocks at the lower price and return them to the original lender, creating a decent profit in the process.
In GameStop’s case, it was (and currently still is) the most heavily shorted stock on the market as the result of the actions of multiple hedge funds such as Melvin Capital. GameStop had been a declining brick and mortar retailer as they hadn’t been able to adjust with the changing times as technology and games diversify which prompted investors to take short positions well in advance.
Fast forward to a subreddit called r/wallstreetbets where a bunch of people realized what had been happening with the GameStop shorts and saw the potential for a return of the brand itself due to its’ large existing customer base and extract a high share price by holding the stock. With the help of millions of other Redditors, the stock has been in high demand and is being scooped up by investors who have even a little to put in towards the cause. After celebrities such as Elon Musk stepped in to show their support, the price skyrocketed even more and continues to be a source of fuel in the GME fire.
Hedge funds put themselves in risky positions when they choose to short stocks. When they realize the price is actually rising, they cover their shorts to minimize losses and escape the situation. With GameStop, there are currently so few shares available that it is becoming difficult and as a result, quite costly to pay for the value of the overall short. In essence, it’s getting too expensive for the big players and they are more than sweating at this point.
What started off as an intelligent idea to raise the share prices became a battle between both sides as some resentment towards these hedge funds for taking advantage of the system and having extra privileges was brought to the surface. Now after about 6 months, the stock has boomed by over 8,000%. Efficient and appealing apps such as Robinhood have come into the spotlight for making the purchase and viewing the progress of the stock a clean and efficient experience. After limiting shareholders in their sales in the past couple of days though, Robinhood has lost a great deal of support and is opening the doors for other avenues of investment to take off (such as Fidelity to a greater degree).
This past Friday marked the day the short options expired and now they must be filled which could take all of next week to complete. Shareholders are refusing to sell as a result of the Reddit traction received and are hoping to drive the price even higher to unprecedented levels and claim something for themselves in the face of the gluttonous hedge funds.
While this is certainly interesting to witness theoretical economics, it is a real battle that shows there are gaps in accountability within our financial system. There is no such thing as a free meal. Even if the someone who pays for the whole situation is the hedge funds, the repercussions will still be felt but will remain a pivotal moment in our global financial history as something that started with a small group of people is now a global struggle for success.
– Azaan Moledina
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