Who is losing money on the stock market with GameStop?
Someone had to lose when Reddit trolls used GameStop as a pawn to humiliate the Wall Street establishment. Who are the millions-losing investors?
Amateur traders, led by user “DeepFuckingValue,” with the subreddit bio “Like 4chan found a Bloomberg Terminal,” organised themselves to gradually buy up shares in the retailer, driving up the price of its stock while also making a tonne of money for themselves and defying the strategy of the largest hedge funds that would have bet against it. Surprisingly, it was successful.
The stock price of GameStop increased from $4 last summer to $20 at the end of 2020 and then to $40 two weeks ago. On Monday and Tuesday, it was worth about $100 at times, and on Wednesday, it peaked at over $450.
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Who has Experienced a Loss at GameStop?
Wall Street investors who had “shorted” GameStop stocks were counting on the price dropping so they could withdraw their money, but a massive increase in investment has caused the price to soar and left them unable to close their positions.
The two significant hedge funds Citron Research and Melvin Capital are considered to have been the most exposed. On a number of shorts, including GameStop, the former is thought to have already lost about 30 percent of its $12.5 billion under management this year.
Business Insider estimates that short sellers have already lost over $5 billion betting against GameStop and has compiled a list of funds that have fallen victim to the “Reddit army,” including Melvin and Citron as well as Point72 Asset Management, D1 Capital Partners, Maplelane Capital, and Candlestick Capital Management.
As a result of some funds being forced to sell some of their best-performing stocks, including Apple, to cover billions of dollars in losses, the global equity markets have also suffered, according to Reuters.
A share in GameStock was worth over 100 times as much in August at its peak, so Reddit traders who were wise enough to cash out while the going was good will have made a fortune.
Others won’t be as fortunate. The fact that GameStop’s shares are unlikely to remain high for very long now that the play is truly public means that anyone who is still purchasing the retailer’s stock at the inflated prices stands to lose out.
J.P. Morgan has now compiled a list of 45 stocks, including real estate firm Macerich Co, restaurant chain Cheesecake Factory Inc, and clothing subscription service Stitch Fix Inc, that may be vulnerable to future “fragility events” like this.
Trading in GameStop Resumes on the Robinhood App
Commission-free trading apps enable small-time stock market traders like the now-famous Reddit traders, enabling “normal people” to buy and sell stocks as they please. This effectively democratised the entire system.
Up until Thursday, when a number of brokers, including Charles Schwab, Robinhood, and Ameritrade restricted trading in GameStop and a select number of other stocks on their platforms.
The restrictions caused a sharp decline in GameStop stock. However, on Friday morning, Robinhood lifted some of those contentious limitations, and GameStop remained a popular item, immediately increasing by 50%.
Allegations that the hedge funds used their influence over Robinhood and other trading platforms to stop the upward trend followed the restrictions put in place on Thursday. The philosophy of Robinhood, as stated in a tweet from 2016, has come under scrutiny. The company said, “Let the people trade.”
GameStop is Why?
What led the users of the Reddit community WallStreetBets to play around with GameStop in particular?
The 37-year-old business is the biggest physical video game retailer in the US, so it’s hardly the stereotypical underdog. The coronavirus pandemic forced the company to close stores, and the company faced a bleak future as a result of increased competition and consumers increasingly turning to online retailers to buy the newest video games. However, this honour carries significantly less weight today than it did in the 1990s.
It trades as NYSE:GMO in the S&P 600 index and runs 5,509 retail stores across the US, Canada, Australia, New Zealand, and Europe.
The stock was one of the most “shorted” on the market because investors and hedge fund managers believed it had a very low chance of success. Shorting a stock involves betting that the price will fall.
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Short Selling: What is it?
In other words, it’s the practise of betting against a company’s success by anticipating a decline in the value of its stocks. In other words, a no-confidence vote.
When someone “short sells” a stock, they borrow and sell shares of the stock they do not own on the grounds that they believe it will decrease in value. If everything goes according to plan, they close the deal by purchasing more stock for a lower price, returning the stock to the owner, and keeping the difference.
The trader is “exposed” and is required to make up the difference if the wager is incorrect and the stock price rises rather than falls as predicted. A “short squeeze” is the term used to describe the situation where a trader is compelled to sell a stock for a higher price rather than a lower one. And if the price keeps rising, the loss will only continue to increase.
Even though short selling is one of the riskiest trading strategies, it can also be one of the most profitable.
A company’s stock price is effectively pushed lower when large hedge funds short sell it for millions of dollars, which spreads a bad impression of the stock.
