What Happened with GameStop Last Week?

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(Artwork/Kacey Fisher’22)

Arjun Ray, Online Staff Writer

For nearly half a decade, GameStop, a haven for gaming culture aficionados, had been in decline. As gaming-related transactions have shifted online, the chain has seen rapid drops in revenue and popularity. Last week, the internet was taken by storm as GameStop shares, which started 2021 at $3.95, skyrocketed to a price of nearly $350. This surge was fueled by a group of small Reddit-based investors on the subreddit ‘r/wallstreetbets,’ whose mass buying of GameStop shares drove up prices. According to freshman Riley Schmidt, “This is an example of free-market capitalism prevailing over rigid corporatism, epically.” 

The reason why the Redditors’ actions were such an upset to Wall Street is because they caused immense losses for hedge funds and short traders. For years, GameStop has been a stock frequently shorted by traders. In essence, shorting is when brokers or hedge funds lend shares of a certain stock to a trader. In return, the trader intends to return the stock after a period of time with an additional value. Then, the trader sells the borrowed stock to the market. If the stock price falls, the trader buys it back for a lesser price, making a profit. Then, they return it to the hedge fund or broker, along with the additional money they promised. However, traders undertake this process betting against the stock, with the assumption that its price will fall. When the Redditors teamed up to push GameStop’s stock price unexpectedly, the traders shorting the stock were still required to return it to the broker they originally borrowed it from. Thus, last week, they ended up losing large amounts of money to purchase the stock back at a higher price than they sold it for, and they then had to use money from their own pockets to fulfill the additional value they intended. On the scale of Wall Street, this meant that hundreds of millions of dollars were lost for the traders, while the group of Redditors gained money. 

Members of Princeton Day School’s Future Business Leaders of America (FBLA) chapter expressed, “GameStop’s price will surely return to normalcy within the next few days, but this event may have inspired a new generation of traders seeking to recreate last week’s phenomenon. This will serve as a cautionary tale for hedge funds, who now have ‘meme-driven’ investing on their radar.”

Sadly, for many Redditors, their success was short-lived. The price has again plummeted, and many users are disappointed that they missed out on making a massive profit by selling their shares last week. However, chatter on online forums points towards this sort of artificial manipulation of stock prices is happening again. Prime targets for these groups of minor investors include other heavily shorted stocks, such as AMC.

A controversy that has emerged from this situation is the scrutiny of Robinhood, an investment app that blocked users from trading GameStop last week during the chaos. It has faced criticism for this move, which many believe violated financial guidelines. Even so, these events may be the sign of a new era of investing. Although large Wall Street firms currently dominate the financial arena, we have seen the impact that a collective effort of small social media users can have.

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