From The Archives: When Reddit Met Wall Street - The GameStop GameChanger
In the colourful world of stock market shenanigans, where wolves of Wall Street roam free, a group of internet mavericks on Reddit's Wall Street Bets forum decided it was high time to rewrite the rules. The result? A stock market saga that's more thrilling than a superhero blockbuster and more meme-worthy than a viral cat video. The GameStop short squeeze, also affectionately known as "Gamestonk," catapulted an unassuming video game retailer into the stratosphere of Wall Street drama.
GameStop: The Underdog in the Stock Market
Picture this: GameStop, a brick-and-mortar video game retailer known for its chain of physical stores where customers can buy and trade new and used video games, gaming consoles, accessories, and other electronics. But can you believe it had a stock price lower than your morning coffee bill in the late 2010s? Hedge funds and other large investors had placed their bets against this once-mighty titan, causing its stock price to fall below its book value, signalling impending doom. When the COVID-19 pandemic hit in early 2020, GameStop seemed like a sinking ship, adrift in a sea of uncertainty.
However, something unexpected happened in 2021. A new generation of retail investors, armed with stimulus checks, unemployment checks, and free time during global lockdowns, saw an opportunity to take advantage of GameStop's low share price and high short interest. They began buying shares of GameStop stock in droves, defying the odds and triggering a short squeeze that would go down in stock market history. GameStop, the hero nobody expected, was about to embark on a heroic quest of its own.
What Is a Short Squeeze? The Market's High-Stakes Rollercoaster Ride
In the world of stock trading, shorting shares is being what you call the ‘Bear Gang’ – you buy something valuable, hoping its price will tank. Then, when the moment's right, you sell it, pocketing the difference. But a short squeeze is the plot twist that keeps everyone on the edge of their seats. Imagine this: you buy a friend's bike to sell it, hoping the price will drop so you can buy it back cheaper. But suddenly, instead of falling, the bike's price skyrockets. You're now stuck pedalling uphill, desperately buying it back at a much higher cost. That's a short squeeze in a nutshell. And when a mob of internet warriors realised GameStop was the bike to bet against, they pedalled their way to victory, sending the stock price soaring to unthinkable heights.
Deciphering the Stock Market's Sneak Attack
GameStop, a struggling company with falling product demand, saw its stock price falling during the mid-to-late 2010s. Hedge funds and big investors capitalised on this by shorting the stock, essentially betting it would drop further. What's intriguing is that they shorted more shares than were available for trading, made possible by borrowing shares from brokers and institutions.Well, it's a bit like a high-stakes poker game where these financial players borrowed shares from brokers and institutions, essentially getting an IOU (I owe you) for the shares they wanted to sell. This practice, known as "naked short selling," is a bold gamble. Imagine strolling into a casino and placing bets with money you don't have, hoping your winning streak will cover your losses. That's the kind of risk these players were taking.
In January 2021, the unexpected occurred. The stock price surged, thanks to retail investors, led by Keith Gill, who discussed stocks, including high-risk ones like GameStop, on Reddit. As the stock climbed, short-sellers panicked and rushed to buy GameStop shares to limit losses. Simultaneously, regular folks kept buying, creating a buying pressure in the market. With this intense demand, the stock price shot up from $20 to $400 in less than two weeks.
Elon Musk, ever the Twitter maestro, even chimed in with his "Gamestonk" tweet, adding fuel to the fiery hype. On August 30, 2019, GameStop stock suffering a 71% drop in 6 years closed at $3.97 per share, a mere shadow of its former self (trading around $14 in 2013). By September 30, 2019, the company had repurchased and retired about 34% of its outstanding shares, a desperate move to stave off the grim reaper. Fast forward to late January 2021, and GameStop's price skyrocketed to a premarket high of over $500 per share, leaving even the most seasoned Wall Street pros in awe. This was one of the most notorious short squeezes in stock market history, a tale so wild it was immortalised in the 2023 film "Dumb Money," a rollercoaster ride of epic proportions that will be remembered for generations to come.
How Does the Internet Join the Stock Market Party?
The internet was a big part of what happened. As mentioned, a guy named Keith Gill started investing in GameStop in 2019. He thought the stock was undervalued. He talked about his strategy on a Reddit forum called r/wallstreetbets, even when the stock was doing badly. This Reddit group is where people chat about risky stocks. They believed GameStop was worth more too. Because many investors were betting against GameStop, they wanted to make the stock price go up a lot so these bettors would lose money. On January 27, 2021, a lot of people went to that Reddit forum to read about what was happening. It was like a record-breaking day with 73 million views because of what they were doing with GameStop's stock.
A Guide to Dodging 'Short Squeezes' Like a Ninja
A Short Squeeze is an unexpected event that occurs when stocks of a company in a short position suddenly rise in price due to positive news. Therefore, investors must exercise caution when choosing stocks to invest in. It's crucial for investors to consider factors such as the short percentage of float, which represents the percentage of tradable shares currently in a short position; any figure exceeding 10% is significant. Additionally, the short interest, indicating how many days of regular trading it would take to buy back all shorted shares, should be taken into account. Investors should avoid highly shorted stocks, and if they do get involved, it's advisable to cut losses by exiting the position promptly.
Retail Investors Taking Stock Pop-Culture Style
In the stock market's epic tale of Reddit vs. Wall Street, the GameStop short squeeze was like a blockbuster movie starring passionate retail investors from Reddit's Wall Street Bets forum flexing their financial muscles. But guess what? This action-packed event wasn't a one-hit wonder. Recent years have seen retail investors donning capes and influencing markets in ways that would make even the Avengers envious.
Dogecoin, the cryptocurrency that started as a joke fueled by internet memes, transformed into a financial superhero, all thanks to the "Doge Army." Memes, social media buzz, and a sense of community propelled Dogecoin to unexpected heights, proving that in the world of digital assets, the internet can turn a meme into millions.
But that's not all! The meme stock frenzy, ignited by GameStop, spread like wildfire, engulfing companies like AMC Entertainment and BlackBerry. Inspired by GameStop's success, retail investors aimed to replicate the magic, creating short squeezes that sent stock prices on a rollercoaster ride. It's like a series of spin-off movies in the meme stock universe, where Redditors rewrite the script and challenge Wall Street norms.
In the grand scheme of things, the GameStop saga is a pop culture-infused reminder of how retail investing is evolving. The internet and digital communities are rewriting the rules, not just with meme stocks but also in the wild world of cryptocurrencies like Dogecoin. This is the democratisation of finance, where retail investors wield their online superpowers, reshaping the market narrative in ways that were once unimaginable. So, buckle up, because the next chapter is sure to be just as thrilling as the last!
Authors: Arunav Sharma and Madhav Chawla Illustrator: Ojas Arora