GameStop Stock Rises, Hedge Funds Take A Toll

   Financial lingo has never quite been my forte. However, you need not be the Wolf of Wall Street to have heard what is going on with GameStop’s stock. So, to spare the people who, like me, would rather have articles explain the situation as if we did not spend our time in Financial literature class, here we go.

   GameStop, even before the COVID-19 pandemic, was struggling in the market. As a brick-and-mortar retailer, Gamestop could not step up to the plate against digitally downloadable games from home, or even on console subscriptions allowing players access to multiple games (most worth $60) for $15 a month.

   On Nov 16, 2020, RC Ventures, one of the largest stockholders of GameStop Corporation, released a criticism of Gamestop’s current state in the stock market.

   “GameStop is also one of the most shorted stocks in the entire market, which speaks volumes about investors’ lack of confidence in the current leadership team’s approach, “ said The RC Venture capital firm. Things were looking not looking well for GameStop until a group called “r/wallstreetbets” on the popular discussion board platform Reddit noticed how two companies, Melvin Capital and Citron, placed a large short on the GameStop.

   Usually, when buying stocks, there is the mentality of “buy low and sell high.” This mentality ensures that when you sell your stock you can actually make a profit instead of losing your money. However, what Melvin Capital and Citron were doing was shorting the GameStop stock, in essence betting the share price will go down. If the share price went down Melvin Capital and Citron would make a profit off of the difference made from GameStop’s current share price to the price the share was when they placed the short.

   The problem with shorting a stock, which Melvin Capital and Citron experienced first hand over the weekend, was when the share price does not decrease but instead increases. Turns out that when the “r/wallstreetbets” group saw how large of a short Melvin Capital and Citron placed on GameStop, they started buying the shares. And when I say they started buying I mean they really REALLY started buying. They were buying so much that the share price of GameStop’s stock started to increase around 400%  according to Market Insider

   The share price increase is great for all of the retail traders buying into GameStop shares, but horrible for Melvin Capital and Citron. As because they shorted the stock, the more the share price increases from when they placed their short, the more and they owe. This being one of the instances where we see a victory for the little guy against hedge funds to David and the Goliath proportions. 

   “Now people have the tools and the communication abilities to do something like [the GameStop short squeeze],” said Ben Carlson of Ritholtz Wealth Management according to MarketPlace.

   To think that meme culture has actually influenced the stock market with such ferocity was intriguing to see. While GameStop’s share value will ultimately decrease from now, due to the fluctuating attention of meme culture, the aftermath is still something worth talking about. 

     20 years prior this could not have happened, not to the same extent we have seen this past weekend. The GameStop short squeeze is a prime example of how the internet can be used to rally and organize people instead of being a battleground of political debates.