History may record what happened last week as ‘The Battle for GameStop’ – where the inner workings of hedge fund managers, who were hoping for GameStops demise met a surprise attack by the collective might of online Reddit users. This David vs. Goliath type occurrence has caused, overnight a major shift in the financial world.
But what exactly happened?
Here’s all your questions answered below.
What do GameStop and Reddit have to do with each other?
Up until a few days ago nothing really. Reddit is a online chat forum that allows users to interact with each other on any given topic, whereas GameStop is a US company with sections worldwide that specialise in video games and other gaming merchandise. One such Reddit chat forum known as ‘wallstreetbets’ had noticed that hedge fund managers were ‘short selling’ GameStops stock. Essentially, what this means is that these hedge fund players would have received a profit if GameStops stock price were to fall.
What’s a stock price?
Companies such as GameStop that list themselves on the stock market are made up of different shares. The stock price refers to the price of these shares.
What is short selling?
Short selling is a betting strategy adopted by investors to make a profit. If an investor believes a company’s share price is about to fall, that investor will purchase shares from said company, usually through a broker. Following this, they proceed to sell those shares into the market and later, when the fall in market price occurs buy back those shares thus making a profit. Still confused? Let’s use a better example – cars.
Let’s say Jimmy buys a car from a dealership, knowing that that car will depreciate (lower in value) in a few months time.
Equipped with this knowledge Jimmy sells the car to a man named Frank for €40,000.
A few months later Jimmy buys the car back from Frank for €35,000. Jimmy has just made a profit of €6,000!
Of course, transactions such as this rarely occur. But replace car with share and you will understand the concept of short selling.
So what did these Reddit users do exactly?
The users of the Reddit chat forum ‘wallstreetbets’ increased the market price of GameStop, thus halting the hedge fund managers’ profit accumulation in their tracks. This was achieved by collectively purchasing multiple shares in GameStop.
Let’s refer back to Frank and John’s car transaction to explain further.
Let’s say that Frank’s friends are aware of Jimmy’s scheme and understand that he is selling Frank short.
To combat Jimmy’s deception Frank‘s friends begin to artificially boost the price of the car. They do this by buying the same kind of car in several different car dealerships – boosting demand for the vehicle thus increasing price.
This causes the price of Frank’s car to rise from the previous €40,000 to over €50,000! So when Jimmy buys the car back from Frank he will actually make a loss of over €10,000! Frank really has some loyal friends…
So was GameStop saved from extinction?
Not exactly. What the Reddit users did was artificially boost the price of GameStop (heavy emphasis on artificially). The price of GameStop is not actually represented by the shares it has. This did, however elicit laughter from the online Reddit community and anger as well as disgust from the financial world. A user of the aforementioned Reddit chat forum Louis Rossman, speaking to Yahoo Finance described the ‘motivations’ of the Reddit users as a “middle finger to the establishment” going on to describe the manoeuvres as a “war between people who are incredibly aggravated at a financial sector that appears to always win while normal people lose”.
Phew! That was a lot of information… So enjoy these memes on the saga.