GameStop and BlackBerry’s stock has risen over the past few days. Here’s what’s going on.
Sarah Tew / CNET
On Monday morning, a bunch of Reddit users decided to play the market and push the stock for video game retailer GameStop – up to almost three times its average over the past few months. Then they started spreading their strategy to the struggling film chain AMC and the once popular smartphone maker BlackBerry. And it worked. In fact, it is so good that the investment is equal generated his own lingo and compiled a set of memes. What is happening?
Despite the move is characterized as “insane” and a “Ponzi scheme,” GameStop is now one of the biggest bets Wall Street traders have made lately almost everyone expects it to fail. It all started last week when posters on the WalldreetBets community of Reddit on stock trading attempted to push shares in the struggling game trader. With much of Wall Street’s rivalry against GameStop’s success, WallStreetBets investors believed they could force a rise in the market create question where there was little before.
The result: GameStop shares rose more than 822%, from $ 17.25 at the beginning of the year to a high of $ 159.18 on Monday. Then it dropped by almost half, but only to rise to $ 147.98 on Tuesday. And then Tesla CEO Elon Musk tweeted about it (use that vocabulary we mentioned), and the price rose by 40% in the after-hours trade. On Wednesday morning, it reached new highs, with about $ 315 per share.
The Reddit community also watched BlackBerry and tried to do the same trick. So far, their shares have more than doubled from $ 6.58, where they started at the beginning of the year. On Tuesday, the stock closed at $ 18.92. On Wednesday it is about $ 22.
There is also AMC. Reddit targeted the one and also cultivated the hashtag #SaveAMC on Twitter. Its stock jumped from $ 2 a share last week to about $ 14 on Wednesday morning.
Here’s what you need to understand about GameStop, AMC and BlackBerry.
How did it happen?
GameStop is one of the largest retailers of video games in the world, but it is struggling to stay relevant in the era of online sales.
The WallStreetBets crowd effectively created artificial demand for GameStop and BlackBerry shares with their own money. There are 2.2 million members of the WallStreetBets community, though it is almost impossible to determine how many people are involved in the GameStop and BlackBerry scheme.
What happens is that the price goes up by buying a lot of GameStop shares quickly. This is normal. However, with GameStop, there are also many short sellers, or people who effectively bet that the stock will fall rather than rise.
But there is a problem. If GameStop’s price rises too fast, short sellers – the people who bet on GameStop’s battle – will be forced to buy even more shares to cover their losses. This pushes the stock even more.
This is how we suddenly see GameStop’s jump in value.
See also: GameStop’s share was fueled by slang from the WallStreetBets community of Reddit. This is what it means
What is a short seller?
When people buy a stock normally, they bet that it will rise or share enough profits that they will make more money than they put in.
Short sellers, or ‘shorts’, do the opposite. Shorts trade with borrowed money and sell the shares in the hope that they can make money if the stock falls in the future.
Imagine Ian Corp. is a public company and its shares are worth $ 10. A “short” will borrow shares of Ian Corp and sell them for $ 10. Their bet is that Ian Corp’s share will actually drop lower – maybe up to $ 4. If that happens, they can buy the shares at $ 4 and put the other $ 6 in their pocket.
If the shares of Ian Corp jump to $ 25, the moneylender who made this bet could push the short head to cover their bet. This means that the short-term will effectively buy the shares at the new, higher price.
If a short head is right, they can make a lot of money against a business. But if they are wrong, they can also lose a lot more money.
There are also other options and tools to bet against the future of a business.
GameStop stock from January 19th to January 25th.
Google Finance
How much money did the GameStop shorts lose?
The losses turn out to be huge. According to MarketsInsider, shorts seem to have lost $ 3.3 billion against GameStop this year. About $ 1.6 billion, or about half, of the losses occurred Friday when the stock jumped 51%.
It is also noteworthy that GameStop started the year as one of the shortest businesses in the market.
It looks like a lot of money
That is, but what is perhaps an even greater indication of how dramatic these moves were, the sale of GameStop shares was halted during trading on Monday because it was moving too fast.
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These wild swings will not last forever, will they?
The popularity of retail investments is part of this behavior, or when traders who are not calling on Wall Street buy and sell stocks. Stock trading programs, often without fees, have made it easy for people to jump into the market. And social media has helped people pull together and enlarge each other to buy more and more shares.
“GameStop’s march is one of the most striking market movements to arouse concern among fund managers, some of whom believe that trading by individual investors eliminates stock prices with fundamental factors,” the Wall Street Journal wrote on Monday.
How does Wall Street react?
Big name trading apps like Robin HoodETrade and others apparently struggled to stay online amid all the hysteria. TD Ameritrade acted on Wednesday to sudden increases in demand, “from an abundance of caution in the midst of unprecedented market conditions.”
Nasdaq said it would stop trading on a stock if it found a link with unusual activities on social media. The company said its role as a ‘self-regulatory organization’ was to ensure that its markets acted in a ‘legal manner’. “Regulators need to catch up with the technology now available,” Nasdaq CEO Adena Friedman told CNBC on Wednesday.
What do the companies think of all this?
GameStop did not respond to a request for comment. BlackBerry executives told MarketWatch that they were not aware of any reason for the recent trading activity. BlackBerry did reach an agreement with Facebook earlier this month over a patent battle, though the terms were not disclosed.
Why do the Redditors do this?
There is the seemingly easy money aspect, which in itself is compelling when you are so comfortable with risk. But some of them also present it as a crusade against Wall Street. “We’re at war,” one Redditor said Wednesday. “A war for the redistribution of wealth.”
Why did Elon Musk get involved?
In addition to being a prolific Twitter user, Musk also recently learned that he can drive people to different companies’ shares. He tweeted about how much he likes buying something for his dog from Etsy, and the stock jumped. Now he was tweeted about GameStop, and the stock jumped even further.
Should I try to get into the madness?
It is always wise to consult a financial professional before making investment decisions.
Correction 25 January at 17:52 PT: The explanation of short selling has been established to make clear how the process works and that there are different ways to bet against the rise in the share price of a company.