Who would believe that a brick and mortar game store would skyrocket its stock price amid a pandemic? It is even more impossible to believe that the huge spike was driven almost entirely by a Reddit community.
There are three things we need to understand: the Sub-Reddit Wall Street bets, GameStop, and a basic understanding of the stock market.
Basically, Wall Street bets (WSB) is a Sub-Reddit about investing in the stock market, which started pretty niche, but now has about two million subscribers.
GameStop is a U.S. company that sells video games.
As for the stock market, the main thing that needs understanding is about shorting. Shorting is when a company is thought to perform badly such that one would borrow a company stock from a broker and promise to return them later.
GameStop is a brick and mortar video game company after the pandemic hits. Like any company, GameStop had a couple of revenue falls and bad months, making its stock price plummet to about four dollars a share.
Largely because of its terrible state, several big international investors thought that GameStop would essentially go bust. So, they shorted GameStop stock and hoped to witness its collapse. However, they failed to see the company’s savior.
In mid-August, the founder of Chewey, Ryan Cohen, bought GameStop shares. Only four months later, Cohen’s company, VC Ventures, already bought nine million shares equivalent to 13 percent of GameStop. By January, Chewey founder Ryan Cohen, former Chewy COO, CMO Alan Attal, and former Chewy CFO Jim Grube were appointed to the video games company’s board.
It basically looked like Cohen decided to get involved with GameStop. As a billionaire who made most of his fortune from an online pet food retailer, Chewy, GameStop seemed to have a big advantage. A billionaire with experience in running e-commerce companies is exactly what GameStop needs. The Year five and Xbox Series X got released in November, marking the start of a new console cycle, which is certainly good news for GameStop. Further, GameStop signed a deal with Microsoft, which gave a share of all Xbox digital. Further, GameStop signed a deal with Microsoft, which gave them a share of Xbox’s digital revenues.
Over the same period, it would seem that the institutions shorting GameStop decided to buy up more short positions in desperation to defend their earlier shorts. To try suppressing the stock price, they actively shorted more.
On January 11, a massive 4 million short positions were taken, despite the board appointments on the same day. In total, about a staggering 71 million short positions were taken, while GameStop only has a float of 69.75 million shares.
It got crazier because 20 percent of GameStop shares were held by insiders such as Cohen. Insiders cannot easily sell due to regulations. About the same amount is also owned by big institutions that do not actively trade either.
That then leaves between the “supply” of 20 and 30 million actively traded stocks and the “demand” 71 million short positions, which all need to buy stock. The law of supply and demand dictates that with less supply and high demand, price increases.
Wall Street bets realized the status and thought that they could force the price up if they bought stocks and held them. Such a condition is known as a short squeeze, where people with short positions would buy into a stock and try to cover it before the price gets enormously high. They would be losing money in the process but better to prevent losing more. Indefinitely shorting a position also costs money due to interest, so that wouldn’t be an option.
As a result, GameStop’s stock went from five dollars in September to twenty dollars in December, then doubled in mid-January, and to a ridiculous 150 dollar peak.
Ultimately, Reddit made huge sums, and short-sellers lost big time.