I fondly remember visiting my local GameStop on occasional Saturdays to trade-in my old games, catch up on any recent gaming news, and hopefully buy a new game for my collection. At the time, it was such a treat to walk around the store, with its colorful game covers and bustling environment creating an energizing and interesting atmosphere. However, such brick-and-mortar game stores have become nearly obsolete at this point, even in pre-COVID circumstances. Games are much more easily accessible in an online store, and, for fans of picking up games in person, mass-market retailers like Walmart and Target present more convenient solutions. Thus, GameStop, and subsequently GameStock stock, had been on a downward trend for quite a long time, a process only exacerbated by the coronavirus.
However, this admittedly natural downward progression of GameStop was artificially and dramatically altered by a group of Redditors just weeks ago. On the social media site Reddit, groups of individuals under the subreddit r/WallStreetBets banded together to collectively buy massive amounts of the game company’s stock, causing the price of a single share to skyrocket 1,914.55%, from $17.25 on January 4 to $347.51 on January 27.
The reasoning behind this dramatic and seemingly unprecedented rise is actually quite simple. To begin, it is essential to have a basic understanding of what a hedge fund is. Simply put, a hedge fund is an investment fund that gains money through the stock market by means other than the traditional route of investing money in stocks that are considered to rise. Oftentimes, hedge funds will short stocks, meaning that they invest money into a stock that they deem will fall, and, if the stock loses value, profits increase. This is what happened with GameStop, as hedge funds invested vast amounts of money into shorting GameStop stocks, with the near assurance that the stock would fail eventually.
Of course, this turned out to be nearly opposite of what happened. As small, at-home investors, trading through apps such as Robinhood, began to band together and coordinate their efforts against such hedge funds, prices began to climb. Because shorting stocks works in opposite effect to investing in stocks, the more that GameStop continued to rise, the more hedge funds were losing money, with one hedge fund called Melvin Capital losing billions of dollars from the event.
Another factor driving the growth was what is known as a “short squeeze”, in which hedge funds needed to buy the rising GameStop stock to cover the losses of the short. Thus, prices continued to rise, as these hedge funds invested more and more into the stock to cover their growing losses.
This event was further exacerbated by media attention, with social media sites, such as TikTok, as well as major news outlets covering the unpredicted and shocking rise of the stock. In fact, it is estimated that around 9% of Americans invested some sort of money into GameStop in the last month (Yahoo Finance). Similarly viral stocks, such as AMC and Nokia, gained similar attention as well.
At this point, however, GameStop seems to be generally back to its original state. The stock, which is at around $51.20 as of February 10, has dropped 85.27% since its height of $347, and seemingly continues to fall. The company itself made little mention of the event, and did not seem to capitalize upon the newfound fame and attention in any financially significant way. Finally, although the stock has apparently made millionaires out of simple retail investors, it is generally agreed that GameStop, as of now, is not worth your investment. But who knows? The stock market is notoriously unpredictable, and if a couple of Redditors could crack the code, maybe you could too.