Stock market chaos upends financial world
Over the past few weeks, GameStop has become the focus of one of the greatest Wall Street Cinderella stories ever told.
The famed video game retailer was once an essential institution in the gaming community that made both domestic- and foreign-made video games accessible to people everywhere in the U.S.
Today, GameStop is quickly being made obsolete by digital storefronts cutting out the traditional retail middleman and by retail supergiants like Amazon undercutting GameStop’s prices. The company closed nearly 10% of its stores in 2020 and had plans to close up to 20% of them by March 2021. GameStop’s future was grim, and it seemed the company would soon be gone and forgotten.
Struggling corporations with public shares on the stock market often have their shares short sold or “shorted” by investors. Shorting is essentially a way for investors and hedge funds to make a profit off struggling corporations’ falling stock prices.
The practice entails borrowing a company’s shares and quickly selling said shares. If the company’s share price falls, then the investor can buy their shares back at a lower price and turn a profit; but there’s a catch. If the investor is wrong and the price of the stock they short does not fall, there is tremendous potential for those investors to lose a lot of money.
The price of GameStop’s shares had been steadily falling since 2015. All the while, their shares were being shorted until their share price hit a record low of under $3 a share last year. Their stores were closing and the business was struggling to keep its storefronts afloat during the coronavirus pandemic.
Enter Reddit’s r/WallStreetBets. Tired of seeing such a beloved company being shorted and taken advantage of, a group of amateur traders on the internet web forum Reddit gathered around the common cause of ensuring the short sellers would pay. Together, they invested tens of millions of dollars into GameStop’s stock (GME) and sent it to the moon.
By Jan. 28, 2021, one share of GME was worth nearly $500 and Wall Street was on fire. Hedge funds lost billions, brokerages were in a state of panic and the Redditors that started it all found that they and their actions were making worldwide headlines.
The initial motivation for the Redditors that raised GME to such heights was to make a statement. Many found short selling morally objectionable and therefore saw their actions as standing up against the hedge funds that have been shorting and manipulating the little guy for too long.
It is unclear whether or not this unprecedented market event will help GameStop in the long run, but their recent cash inflow may at least buy them some time and provide them with enough funds to avoid having to file for bankruptcy for the time being. What does seem abundantly clear is that this statement against short sellers was meant to be heard.
Never before has a group of amateur investors shaken up Wall Street to this extent and forced investors to adjust the way they work, nor has such an event made international headlines. Their message sent shockwaves throughout the world and will not soon be forgotten.
