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  • Writer's pictureSahastha

All About The GameStop Bluff

Updated: Oct 4, 2023

Generally, Stock prices will fluctuate based on different factors such as fundamental factors, technical factors, and market sentiments etc. Technical factors and market sentiment often overwhelm the short run, but fundamentals will set the stock price in the long-run.  There is no clean equation that tells us exactly how a stock price will behave. Unfortunately, few stocks are mispriced at various times due to executive insider transactions,  buying or shorting a stock to hedge some other investment, making intentional solid judgment about a stock , spreading rumors, fake news with the advent of multiple social media platforms and news outlets etc. These will have drastic impact on stock’s price temporarily, keeps the price artificially high or low irrespective of the company fundamentals.

Here  I want to share some insights about how GameStop Game Played By Retail investors.  From many years, the retail investor has been marginalized and the market has been dominated by institutional investors. I think we’ve seen some change in GameStop issue.

As we know the recent GameStop insanity, everyone talking about. GameStop is the largest video game retailer worldwide. It was a struggling video game chain brick-and mortar game stores across the U.S. and decided to close some of its stores.  After the pandemic hit, GameStop announced it would permanently close few of its store locations. The story of GameStop insanity started in the month of January. The stock price went up, when activist investor Ryan Cohen bought a stake and joins GameStop board, to push the video game retailer to focus on online sales and shutter unprofitable stores in malls. Slowly, the company gained the attention of retail investors in a reddit forum r/WallStreetBets. they decided to buy up shares of the company to further drive up the price and force the hand of short-sellers. This huge online discussion board with its millions of subscribers, massively inflated the price of GameStop. They drove up the price enough for mighty hedge funds to abandon their positions and lose billions of dollars. By the end of January, the stock had gained more than 700% over the course of four trading days, the short position resulted in more than 139% percent of existing shares of GameStop being shorted (this is most shorted equity in the world). By the end of January 2021, one hedge fund was down to 53%.

But this isn’t just about GameStop anymore.  They started talking about buying other shortage stocks like AMC and blackberry. American airlines. Even Elon Musk tweeted at one point that the price of GameStop shot up  – “GameStonk” . This small tweet can have massive effect on prices, the retail investors began to realise how powerful they can be according to market participants. This stock is the most prominent example of a meme stock. Because it has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums like Reddit in just a short amount of time. .

Generally, big investors on the losing side of these trades have to raise money to cover their losses, it could mean dumping enough shares to hurt the prices. Because of their huge purchasing power, they have the ability to drive prices down by selling off large positions in a given stock, and then buying back into the stock at a significantly lower price. Then, these investors ride that price up as others join the rally, they tries to push up the price by buying lots of shares irrespective of  the stock intrinsic value. Here, Large group of retail investors manipulated the GameStop stock price.

Speculating with options or picking stocks for short-term swings is gambling. There is no expectation of future income, only the hope that you guessed correctly which direction the price will go over a meaningless time frame.  This market bubbles and short squeezes not new in the market. The big question is market cannot handle something like this. Before putting money, We must look at the underlying reasons behind the random movements of the stock price, which also include foreign investors withdrawing, promoters bulk amount of transactions, new share issuance, large institutions selling stocks etc.

With the exponential growth in stocks like Tesla, GameStop, and alternative investment like Crypto currency, new age investors thinks there is no end to this party. As and when price increases, so called analysts will keep increasing targets upward. This is not at all a new trend, in fact you can find plethora of examples dating back to tulip mania in 17th century. More related occurrence can be dated back to 100 years, when Radio corporation of America (RCA) surged on investors expectation and excitement over a new technology which is going to change the world. The stock price went up to more than $500 and came down to less than $30during the great depression crash of the market. The company who was going to change the world does not exist any more.

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