How GameStop Soared 400% in a Reddit-Fuelled Stock Rally

Overview 

GameStop is an American retailer specializing in video games, consumer electronics, and gaming merchandise. In August 2020, Ryan Cohen bought into around roughly 10% ownership stake in the retailer.

As the founder of pet food superstore, Chewy.com, which was subsequently sold to PetSmart for around $3.35 billion in 2017, Cohen has shown a tendency to invest large sums of money in large, safe stocks such as Apple and Wells Fargo. However, the massive investment that he made in GameStop as a much riskier investment attracted a substantial amount of notice.

Since August, Cohen invested even more into GameStop resulting in himself along with two other former Chewy executives having been named to the board of directors of the company, providing Cohen and fellow activist investors with potential capability to steer the failing company into a new direction. 

How Hedge Funds ran into trouble when shortening the stock 

When a stock is shorted, it involves borrowing shares from investors who already own shares and selling them at the current market price. Should there be a drop in the market price, the investor can buy the shares back at a lower price and profit from the change in value.

Whether Cohen had the ability to turn GameStop around or not, there was renewed investor excitement surrounding his new strategies and plans for the company which resulted in challenges for the investors and hedge funds who shorted the stock.

As these investors and hedge funds’ short positions came due, the short sellers found that they would have to buy the shares at a new and higher price to cover their earlier loans. 

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The role that a sub-reddit and its users played in boosting GameStop 

During the past week, several seemingly fading companies such as GameStop and AMC theatres saw a sharp increase in stock value. While investors and traders may have been shocked and regarded it as an anomaly, those who are up to date with the online forum, Reddit, were not shocked.

The spikes in the value of GameStop stocks come as result of a targeted wave of enthusiasm which were aimed at boosting the stock valuations from members of the subreddit r/wallstreetbets.

Although a new concept to some, r/wallstreetbets has been in operation since 2012, with deep ties to internet culture. As of this month, with a raging pandemic and financial instability, the sub has grown to previously unimaginable heights, gaining more than two million subscribers in only a few days.

After users successfully popped the valuation of several stocks, including that of GameStop, thousands of new users have flocked to the subreddit. Due to the purchasing efforts of members of r/wallstreetbets, the stock price of GameStop went from a mere $40, ballooning to a high of $492.

As result of this, purchasing power that was previously reserved for high-level investors and hedge funds, who attempted to bring the company down, was placed in the hands of the people.