Investments

GameStop and Market Mania 2021 – How Did It Start and What Is It All About?

Posted by MoneyController on 08.02.2021

GameStop (GME) is a videogame retailer that has been having a rough time in the last few years. With the rise of online gaming and digital sales, GME has slowly lost relevance in the gaming industry. This has caused many layoffs, closures of some of their stores and their share value seeing a continuous decline. The pandemic has only worsened the outlook. This widespread pessimism towards GME resulted in a heavily shorted stock, with large hedge funds like Melvin Capital betting that GME shares would keep falling. Last April the company announced mass closures, and their shares were bought for $3.25 each. Last Friday GME ended the day at $325, pushed up by small investors trying to sabotage hedge funds’ bets. 

Amateur investors in a Reddit forum called “WallStreetBets” have been promoting purchases of GameStop shares aggressively, even painting their buying activities as a “battle of regular people vs. Wall Street firms”. GME’s share price in turn began rising rapidly as momentum built and small investors acquired the affordable stocks using the trading app Robinhood along with others. Even some well-known figures have chimed in, fueling the buying craze. Elon Musk, one of the richest men in the world, sent out the tweet "Gamestonk!!" and a link to the Reddit group, which only further ignited the frenzy. Buyer exuberance has sparked far reaching interest in other heavily shorted stocks both in the US (AMC, Nokia, and BlackBerry) and the UK. Pearson, the education publisher, shot up 17%. CineWorld also rose from a low of 69.2p to just under 90p very recently. 

Most professional traders consider this to be a dangerous and unnatural situation, amounting to mere market intoxication, and one that could have serious consequences in the long run. By now, even The White House has stated that it is “monitoring” this extraordinary surge in the share price of some companies. Analysts continue expressing concerns over a hypothetically unsustainable bubble rising from gossip over actual financial performance. Regarding this, the Securities and Exchange Commission declared it was “aware of and actively monitoring the ongoing market volatility in the options and equities markets”. 

As this army of amateur and small investors continues to wage their “battle” against hedge funds and billionaires through social media and internet forums, the situation becomes tenser. Glen Goodman, Author and former BBC correspondent, considers it “a serious crime, a conspiracy by a large number of people to ramp up the price of a stock. The manipulation of securities is against the law and the SEC should step in”. He also added “eventually, less experienced traders who don’t really know what they are doing will get sucked in - and they’re the ones who’ll lose everything when the price eventually crashes.” 

 

 

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