Gamer Explainer is our series of articles where we attempt to translate the jargon of gaming - what's happening, why it's happening - and what it all means.
The difference here, however, is that what's happening with GameStop actually has pretty much nothing to do with games or gaming, other than it being about a stock for a retail chain that sells games, gaming consoles, and, Funko-Pops. Lots and lots of Funko-Pops.
To understand what's happening with GameStop, we have to explain a few terms from the world of finance and stocks. From the very get-go, it should be pointed out that we're not a financial website, so please, for the love of God, do not take any of this as advice to do anything.
Obviously, we're using very small words and explaining this in an incredibly simplistic way, so really, don't take any of this as a strategy or whatever. With that disclaimer out of the way, let's try and explain what short-selling is.
Shorting a stock is when a trader borrows a stock, sells that stock, and then later has to buy the stock back to return it to the lender. Short sellers want the stock to go down in price because if the stock does drop after selling, the short seller buys it back at a lower price and returns it to whoever lent it to them. The difference between the price it was sold at and the price it was bought at is the profit.
The problem is that it's incredibly risky for the investor, and it often means that the value of the shares for that company are going down. If you buy stock in a company, the only thing you can potentially lose is the money you have invested in that company. Say you buy stock in a company and pay €100 for it at €1 per stock. If the value of the stock goes to zero, your €100 worth of stock is worth €0. If, however, the price of stock goes up to €2 per stock and you sell it at that, you've doubled your investment. Your initial investment is now worth twice what you paid.
If you short sell, however, and the price of the stock goes up instead of down, you can face huge losses as the stock price goes higher. You have essentially bet that the stock price was going to go down, so therefore you borrowed the stock to sell it back at a lower price and, now, the price is higher and you now owe the difference.
For example, if you borrowed the stock at €10 and sold it, expecting it to go down to €5 before buying it back, and it rises to €20, you now need €10 more to buy it so you can return to the lender. The risk is if the prices goes up. The stock price can only go down to zero, but the stock price can keep going up and up. And the higher it goes, the more money you could potentially end up owing.
That's what's happening with GameStop, in a nutshell. Hedge funds had been short-selling GameStop stocks because with the pandemic impacting retail and with people buying games and so forth online more, the value of the company - its stocks - was likely to go down. When you short a stock, remember, you're expecting the price to go down. You look at what that company does, and you decide if it's going to be in a worse position in a few months' time, right? GameStop, according to these hedge funds, was going to be worth a lot less and decided to short it on that assumption.
That changed, however, when a subreddit - that's a forum with a forum on Reddit, a forum website (lots of forums!) - called r/wallstreetbets decided to buy stocks in GameStop to push the price up. How does that happen, you ask?
Let's use an example. Company A issues 100 shares of its company and they're valued at €1 per stock. If you buy up 50 of them, that only leaves 50 on the market remaining to buy. That means there's less of them out there to buy and they're now more valuable. If you hold on to those stocks and refuse to sell them as the price goes up, it's squeezing or pumping the price up artificially.
The subreddit r/wallstreetbets decided to buy up GameStop stocks and pump the price up more and more, way past what its normal stock price would be worth, and now, hedge funds are losing billions because of their shorting of GameStop. Yes, you read that right. Not millions. Billions. What's more, the subreddit is refusing to sell the stocks. The longer they hold on to them, the more they're worth and the worse it gets for the hedge funds like Melvin Capital and Citron Research.
At this point, it's important to note a couple of things. Firstly, GameStop has absolutely nothing to do with this, and are in no way influencing anyone or have involvement in it whatsoever. The other thing is that the people buying up the stocks on r/wallstreetbets are, well, doing this to screw with the hedge funds who wanted to short GameStop. They're actively trying to ruin the hedge funds because, as they see it, they were trying to drive GameStop out of business by shorting it.
The subreddit r/wallstreebets wants to put these hedge funds to the sword because, as they see it, they've been manipulating the stock markets for years and have actively damaged companies by shorting them. They see all this as payback, and everyone watching all this is sort of, kind of, on their side. The hedge funds are losing billions, while a bunch of meme-making oddballs on Reddit are laughing at them while it happens.
If this all seems like it's gambling, that's because it basically is. Hedge funds were betting that the value of GameStop would go down, whereas retail traders - that's essentially normal people who buy stocks and don't go through hedge funds or stockbrokers - are buying up the stock to make the price of it go up. Right now, the value of GameStop stock is $147.98 on the New York Stock Exchange. On January 4th, it was worth $17.25. Even Elon Musk has been getting in on the chaos of it all.
So, what's the endgame in all of this? Nobody's really sure. It could very well be that the SEC - that's the Securities Exchange Commission, the regulatory body over the New York Stock Exchange - might get involved and try to calm the whole thing down, but nobody knows. The hedge funds are losing billions, but nobody's really shedding a tear for them about it. And all while this is happening, a subreddit is making memes and jokes about it all.
We live in a strange, strange world.