A rally fueled by social media users has left established funds reeling under losses.
What happens when stock market fundamentals get mixed up with social media? Well, it can fuel an unprecedented rally in the stock of a company which is bleeding money.
The share price of GameStop Corporation (GME), a company which sells video games and consoles via a chain of stories in the US, Canada, European Union and Australia has shot through the roof this month.
Between January 12 and 26, GME’s stock shot up from $19.94 to around $145 a share, increasing the market value of the company to $10 billion and placing it alongside giant American stocks.
$GME price plummeting after CNBC reported Melvin Capital is surrendering and closing out its short position. Amazingly, it got as high as $365, which meant GameStop had a mkt cap of $25b, making it the 350th biggest co for a minute there (it ranked 1,450th a week ago at $2.7b). pic.twitter.com/cnvFj4DP7d— Eric Balchunas (@EricBalchunas) January 27, 2021
GME, which relies on people visiting the malls where most of its stores are located, has incurred net losses for over a year.
High-speed internet also means that gamers can now easily download new games instead of visiting the store to buy physical copies. The pandemic has further dampened sales.
In the quarter ending October 2020 - the latest period for which GME’s results are available - the Delaware-based retailer reported a net loss of $18.8 million.
It was one of the favourite stocks among short-sellers who make money on bets, anticipating that the value of a company will go down.
The surge in GME followed calls on a Reddit forum, r/WallStreetBets, that it was a way to push back against deep-pocketed funds who were shorting “an underdog company”.
I’m actually in full support of this attack on hedge funds that the wallstreebets subreddit has begun.— UB (@CryptoUB) January 26, 2021
This is perfectly said. pic.twitter.com/OjJbESEL9U
By encouraging enough people to buy the stock, they have created an artificial rally, entrapping short-sellers in their own game.
Short-sellers borrow shares and then sell them immediately in the hope that by the date it’s time to return the shares, the price would have dropped. They return the shares and pocket the difference as profit.
But at times - such as the 600 percent surge in GME stock this month - instead of falling, the share price starts to go up leaving the short-sellers to book losses.
When too many investors rush in to buy a stock, it creates a shortage, further increasing the share price.
As per some reports, short-sellers betting against GME have lost $3.3 billion this year.
The situation has put market regulators on the guard.
NASDAQ'S ADENA FRIEDMAN SAYS WE MONITOR SOCIAL MEDIA CHATTER AND WILL HALT STOCK IF WE MATCH CHATTER WITH UNUSUAL ACTIVITY IN STOCKS - CNBC— *Walter Bloomberg (@DeItaone) January 27, 2021
But the rise is not sudden. Users on Reddit have eyed the GME stock for more than a year - often coming up with reasonable explanations for why the share should rise.
For instance one user, Senior_Hedgehog pointed out in a post that consoles can’t handle new games which need large disk space, meaning people will go back to GME stores to buy disks.
The rally has unnerved established Wall Street fund managers as it indicates that retail investors who use charge-free apps such as Robinhood are increasingly joining the race for quick gains.
Elon Musk, the entrepreneur behind Tesla, added more to the rally with his tweet.