The Gamestop Saga

By Madhushree S.K.

On 8th December 2020, Gamestop announced losses and shut down some of its stores. The coronavirus pandemic led to fall in its sales by 30%. The e-commerce unit, however, was going well. If we cut to January 26 2021, the price of a share of the company rose by close to 1700%. How did this miracle happen? 

The answer is Reddit. A reddit forum “Wallstreet bets” encouraged people to buy the shares of Gamestop in order to punish the Melvin Capital hedge funds, who had taken a short position on the stocks due to the falling profitability of the Gamestop Company. This displays a typical “big guys” v/s “short guy” scenario.  A short position is when an investor sells a security with plans to buy it later when the price falls. For example, if you think that the share price of XYZ company will fall, you will take a short position on it by borrowing a share of that company and then selling it right now at say Rs 50. Then when the price of the shares fall, then you will buy it at Rs 48 (say) and return it to the person you borrowed the share from. Therefore, you make a profit of Rs. 2. This a trading technique which is used in forward and futures markets.

Now coming back to the story, when people started to buy so many shares of Gamestop, the price of that share rose rapidly and even Elon Musk tweeted about it, which in turn led to even more buying of the shares of the Gamestop company. Due to this, Melvin Capital suffered a lot of loss and in fact lost 50% of its investment when it was repaying its borrowers of Gamestop shares. Of course, he did not know something of this sort was going to happen. The total loss of Melvin capital stands at $4 billion. 

Another interesting thing that happened on January 28, 2021 was that the online retail trading platforms like Robinhood abruptly stopped people from buying shares. This disrupted the whole process of increasing the prices of the shares and ended the whole saga. 

It caused buyers to hate on the apps and they felt that the apps are supporting the hedge funds and manipulating the market.

 “It was not because we wanted to stop people from buying these stocks,” Robinhood wrote. “We did this because the required amount we had to deposit with the clearinghouse was so large — with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements — that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements.” Congress and the SEC are now looking into the matter in order to regulate the whole market and make it more ethical. 

References:

  1. https://www.investopedia.com/terms/s/shortselling.asp
  2. https://www.cnbc.com/2021/01/31/melvin-capital-lost-more-than-50percent-after-betting-against-gamestop-wsj.html
  3. https://abcnews.go.com/Business/gamestop-timeline-closer-saga-upended-wall-street/story?id=75617315
  4. https://www.blackenterprise.com/the-robinhood-and-gamestop-stock-saga-explained-by-former-wall-street-professional-ross-mac/#:~:text=Search%20for%3A%20Search-,The%20Robinhood%20and%20GameStop%20Stock%20Saga%20Explained,Wall%20Street%20Professional%20Ross%20Mac&text=The%20stock%20saga%20began%20after,and%20troll%20massive%20hedge%20funds
Share with your Friends

Leave A Comment

X