and how three stakeholders made over $3bn in less than a week
GameStop shares have soared 1,700 percent as millions of small investors, egged on by social media, employ a classic Wall Street tactic on wait for it… Wall Street!
It’s a tale as old as time itself — David vs Goliath, the Ant vs the Elephant, Manchester Utd vs Sheffield Utd — and this week, it’s happened again. Only this time, it’s Wall Street vs Main Street
GameStop is an American video game store that seemed headed towards bankruptcy. Six days ago, its shares were trading at N15,500 ($34) but by January 27th, it was almost 10 times that — an astronomical jump that has totally screwed over billion-dollar hedge-funds like Citron Research and Melvin Capital.
But hold on just a moment, we are getting ahead of ourselves a little bit…
How is it that the stock of a company that almost everyone’s written off suddenly skyrocketed more than 2000% to become one of the hottest properties of the year? One word; Karma!
To understand what exactly happened here and how it’s come about, you need first understand certain terminologies and protocols: Wall Street refers to the high-net-worth investors, large global corporations, or the capital market high finance, usually in control the financial markets, while Main Street refers to your everyday investors, the small independent businesses and investment institutions located further down the totem pole.
So what usually happens when a company like GameStop starts heading towards bankruptcy is that the big-hedge funds from Wall Street (like Citron Research and Melvin Capital) start shorting the company’s shares. What this means is that they start placing bets on its declining fortunes (“shorting” the stock, in other words).
Basically, it means you’re borrowing the shares at their current price and selling them to others (even though you don’t own them). If your hunch is correct, and the share price falls, you can purchase them back from the market at a lower price. You would have made a profit in this situation. Then you can return the shares to the original lender, and pocket the windfall.
Sick & tired of rich hedge funds shorting companies like GameStop, a group of Main Street traders from the popular social media site Reddit decided to come together to “teach” Wall street a lesson.
And what a lesson it’s been so far!
The Main Street guys are so pumped about their success, they have begun to send other old stocks like Blackberry, Nokia, and AMC through the roof. Wall Street meanwhile is determined to win this war and has continued to impede their efforts. The likes of Tesla CEO, Elon Musk, and former Facebook Executive, Chamath Palihapitiya, also tweeting about GameStop further propelled GameStop’s meteoric rise.
GameStop’s largest individual shareholder, Ryan Cohen, has seen his 13 percent stake increase in value by more than $2 billion over the past two weeks. He originally paid about $76 million for the stake and has seen his net worth increase by about $6 million per hour over the past two weeks. Meanwhile, investor Donald Foss, has seen his 5 percent stake increase by about $800 million, while GameStop CEO George Sherman’s 3.4 percent stake is up about $500 million.
Such has been the unprecedented nature of this battle that the White House was forced to admit that it will have to step in if things continue to go out of hand. That said, it is too early to say how long the GameStop saga will continue, or how it will end, but some analysts believe both sides in this skirmish could learn some hard lessons.