IF you’ve not heard of GameStop then don’t worry - you are probably not into video games or fond of gambling on the stock market.
Over the past month, shares in GameStop have gone into orbit. The weird thing is that stock market professional predicted just the opposite. And no wonder: the people hoovering up GameStop shares are mostly working class Americans trading tips via social media sites, particularly Reddit.
GameStop is a video games and peripherals retailer headquartered in Dallas, Texas. It has over 5000 shops in North America and Europe.
As we know, being hitched to bricks and mortar on the high street is bad news these Covid days. Result: the company has been losing money despite diversifying into its own game brands. It has also been the subject of a wave of condemnation for flouting social distancing rules in its stores – though it’s not clear that GameStop’s customers were that bothered.
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Enter the hedge funds. These are where the millionaire and billionaire class gamble with their money. Hedge funds make their loot by borrowing company shares and selling them at a low price. It’s not as daft as it sounds.
After forcing down the stock market value, hedge funds can buy back the shares for cheaper than they sold them - then return the borrowed shares. The hedgies make a profit on the difference between the original (higher) sale price and the new (lower) market price. This is called “short selling”.
There’s a risk involved. If the stock market price of a share goes up rather than down, the hedge fund gamblers lose their shirt.
This is what has happened with GameStop. The hedge funds reckoned GameStop was headed for the knacker’s yard and started “shorting” the shares, thinking they would crash. But small-time private investors – think angry Trump supporters and loyal GameStop customers – started buying GameStop shares in vast numbers, in order to spite Wall Street.
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As a result, GameStop shares have rocketed in value. If you bought $1000 of GameStop shares in the third week of January, your investment was worth $7000 by the end of the next week.
This is sour news for the professional hedge funds. They were so sure they were on to a good thing shorting GameStop that they actually sold more shares than were in circulation (a so-called "negative float"). Result: the hedgies are desperate to buy back GameStop stock at insane prices.
Will the rest of us suffer from these shenanigans? If hedge funds make big losses, they usually sell off all their current share positions and go cash liquid.
This general sell-off can cause a full stock market crash. Witness the Wall Street Dow Jones share index, which is well down in the last few days.
President Trump had pressured the US central bank (the Fed) to print trillions of dollars to boost share prices to artificially high levels, so a general share collapse is in the offing. It would be a strange irony if Trumpian fans of GameStop started the rot.
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