What is Gamestop?

What is GameStop and what on earth does it have to do with us in Australia? Well, the market volatility late last week and likely this week, involves video games an online reddit community and shorting stocks and Robinhood. Brace yourself, it’s going to get weird.

GameStop Corp is an American video game, consumer electronics, and gaming merchandise retailer. The company the world’s largest video game retailer, operating over 5000 stores throughout the United States, Canada, Australia, New Zealand, and Europe, trading under mainly EB games locally.

So, what does shorting a stock mean?

A short position is a practice where an investor sells a stock that he/ she doesn’t own at the time of selling; the investor does so by borrowing the stock from some other investor on the promise that the former will return the stock to the latter on a later date.

A few hedgefunds took out massive short positions on GameStop. There isn’t anything illegal or particularly unethical about that. It is just a bet the share price will drop.

The online community involved is a subReddit called wall street bets. The decided to try and pump the price of GameStop up forcing these hedge funds to make a loss to see if it would work and for a bit of fun. It worked. As of last week the losses are estimated at $20b. No big deal in scheme of things and short positions often fail. AMC Entertainment, a cinema company also benefited from this buying spree.

What is causing concerns is that the price of the stock has been manipulated by social media and online trading platforms. Ultimately the stock is overvalued, but the hedge funds have to buy it back at 30 days regardless of the price. Some investors will make money, many will lose money as the price eventually returns to normal. But from what I can tell from reading Reddit comments, they don’t care about losing a little money each, they just want to win the game. This is a form of protest against wall street it seems.

Most of these trades were done through online trading platform Robinhood, who responded by blocking trades which caused much uproar, and they followed up with limiting trades causing the GameStop share price to crash. This has consipracy theorists blaming Robinhood and accusing them of being in bed with hedgefunds, but they claim it is because the trades need to go to a clearing house for a few days to settle. Robinhood appears to be protecting the hedgefunds. Google removed over 100,000 one star reviews on the app store for Robinhood fro irate consumers.

Supporters even bought a billboard in Times Square New York to further pump GameStop. “$GME GO BRRR,” blared a digital ad on the corner of 54th and Broadway in Manhattan. The ad ran for an hour on Friday.

This has put a shockwave through wall street and caused a sell off, and Australia just follows as usual with a $46 billion sell off. Investors like the perception of integrity in the stock markets, whether or not this is true. The media with the news stories has caused fear of more manipulation to come.

It will be an interesting week for sure. I would expect the volatility to be short term.

As always if you have concerns around this volatility and what it means for you, please reach out to us.