What's Going On With GameStop Stock, in Terms Simple Enough for A Kid to Understand
There's chaos on Wall Street, all thanks to Reddit. But what really happened with GameStop stock? Here's how to explain it to your kid.
Earlier this week, struggling U.S.-based video game retailer GameStop made headlines when its stock jumped (and jumped again) after day traders that frequent WallStreetBets, a subreddit, an online community on the social platform Reddit, coordinated to get stock prices up.
We're talking a huge jump: From $17.25 per share at the start of the year to $159.18 on Monday. This caused a lot of chaos on Wall Street.
While most people know the stock market exists, not everyone knows how it actually works, especially when terms like "hedge funds," "short sellers," and "options" enter the equation.
Here's what you need to know about what happened.
Video game junkies should be familiar with GameStop, a national chain of stores that stocks video games, video game accessories, and acts as a sort of buy-back service, where gamers can trade in old games for cash or credit toward new stuff. Even though gaming has skyrocketed in popularity due to stay-at-home orders from the coronavirus pandemic, GameStop hasn't been doing so well.
CNN reports that the company was "expected to lose money this year and next," even though it added prominent members to its board, including Chewy co-founder Ryan Cohen. That seemed to bolster the company's stock, which got a 13 percent boost on January 11, the day it announced Cohen had joined.
What did Reddit have to do with it?
The WallStreetBets subreddit is aimed at helping out short sellers, who invest in the stock market in a different way than how it typically works.
Traditionally, traders follow a "buy low, sell high" strategy. These investors buy stocks and hope they will rise in value. Short sellers do the opposite and basically "bet" that whatever they're buying will continue to fall. The reason? They plan to eventually buy back the stock at a lower price than they originally paid for. When the stock doesn't fall, the stock price goes up, but short sellers cover their initial investment and buy more to minimize their losses.
It sounds complicated, but it's just a way to make money when a stock falls, instead of rises. This goes against the usual market tactics, which are what hedge funds—a group of investments—use to make money.
When short sellers singled out GameStop, the stock rose continually because other sellers needed to keep buying options.
What are options, exactly?
Options are contracts that give investors the right to buy or sell a stock—but they're not obligated to do so. They offer flexibility and are very popular for the more than 2 million WallStreetBets users.
Buying and selling options isn't the same as actually working with stocks, which are shares of ownership in individual companies. But options volumes do drive stock values. Options traders buy or sell the stock as a "hedge," which forces other investors to keep buying stock to keep the options open.
Why was there so much backlash?
Short selling isn't new but it's a controversial practice and it's no secret Wall Street and hedge funds were not happy. Suddenly, these at-home armchair investors—which often get ignored by bigger players—were feeling validated by their tactics of short selling. Now, it felt like little guys had the same (or more) buying power that established funds do.
"What I think is happening is that you guys are making such an impact that these fat cats are worried that they have to get up and put in work to earn a living," a moderator posted in the subreddit. "That fuzzy sensation you are feeling is called respect and it is well earned. Wall Street no longer dismisses your presence anymore."
The attention from all the trading made GameStop one of the most-traded stocks on the market. Chamath Palihapitiya, a tech investor, gave a detailed explanation to CNBC, explaining that this was a clear indicator that things may be changing. "Instead of having 'idea dinners' or quiet whispered conversations amongst hedge funds in the Hamptons, these kids have the courage to do it transparently in a forum," he said. "What it proves is this retail [investor] phenomenon is here to stay."
Why did selling stop suddenly?
No-fee apps, like Robinhood, allowed traders to get around hurdles that most investors face, which is why veteran traders were astounded that GameStop's stock rose so much in such a short time without them knowing.
Elon Musk, Tesla CEO and the world's richest person, tweeted out Tuesday, "Gamestonk!!" with a link to WallStreetBets, bringing even more attention to the situation. He isn't shy about his dismay for short sellers, also tweeting, "shorting is a scam."
Eventually, Robinhood and other apps blocked users from trading GameStop. Naturally, Robinhood got called out for manipulating the market.
Politicians even got involved
Rep. Rashida Tlaib called on the U.S. House Committee on Financial Services to hold a hearing on the "Robinhood's market manipulation," calling it "beyond absurd."
Alexandria Ocasio-Cortez joined in, too, calling Robinhood's actions "unacceptable" and noting that she'd also support a Congressional hearing "if necessary." In a move that nobody saw, AOC and Ted Cruz actually agreed on the whole thing.
Will this last?
No. It's all happening in a bubble and it's set to burst, especially since GameStop's stock value plummeted after Robinhood's decision to cease trading. The whole ordeal is an example of amateur traders vs. professionals and a new way to approach investing going against established tactics. It does show that at-home investors have power, though, and how they'll wield it in the future is still to be seen.