ST. LOUIS — U.S. financial markets have been thrown into a tizzy by a video game retailer’s soaring stock price.
Shares of GameStop Corp. (NYSE: GME), which primarily sells video games in stores nationwide, traded in the $11 and $12 range in November but skyrocketed to as high as $483 on Jan. 28, as fans, many of whom grew up buying video games at its stores, united on social media and started buying the stock.
They believed GameStop was unfairly undervalued by large investors who had bet billions that its stock would fall. Similar trends are happening with stocks such as movie theater operator AMC Entertainment (NYSE: AMC) and other heavily shorted stocks.
David Presson, director of investments at First Bank, explained the GameStop phenomenon and why it is significant.
What has been going on? It has been a confluence of factors: new, younger investors on social media, bored in the pandemic, eager to stick it to the big hedge funds that had bet against GameStop, and with a desire and opportunity to make money along the way. For many of them, who grew up as GameStop customers, it was like a video game. Their investment thesis was this: One, Ryan Cohen, founder and former CEO of Chewy, the online pet products company, had joined the GameStop board with an interest in transforming it from a strip mall retailer to an online retailer. Two, the original Reddit investors were pretty sophisticated and found that the GameStop balance sheet was not that bad, and three, there were more GameStop shares shorted than available on the market. That's unusual and shouldn't happen.
What is shorting? Shorting means you betting the price of the stock will go down. You borrow stock from another institution that holds it, such as mutual fund companies like Vanguard, and you pay interest on the stock borrowed. When, for example, you pay $10 for a stock and it drops to $5, the shorter doubles his money. But if it goes to $20, or $400 in the case of GameStop, your loss can be a lot more than your original investment.
What is Robinhood, and what does it have to do with this? It is a trading platform, a relatively new one, that made it easier for new, young investors to trade GameStop and other shorted stocks at little or no cost.
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