GameStop and BlackBerry shares have soared in recent days. Here’s what’s going on.
Sarah Tew / CNET
On Monday morning, a group of Reddit users decided to play the market and increase the stock of the video game retailer GameStop – to almost three times its average in recent months. Then they started spreading their strategy to the struggling AMC film network and also to the once popular BlackBerry smartphone maker. And it worked. So well, in fact, that the investment even has generated its own language and amassed a set of memes. What is happening?
Despite the change being characterized as “crazy” and a “Ponzi scheme”, GameStop is now one of the biggest bets that Wall Street traders have recently made, with almost all of them hoping to fail. It all started last week, when posters in Reddit’s stock trading chat community, WallStreetBets, tried to increase the shares of the struggling game retailer. With much of Wall Street’s bet against GameStop’s success, WallStreetBets investors believed they could force a market recovery creating demand where before there was little.
Result: GameStop shares jumped more than 822%, from $ 17.25 at the beginning of the year to $ 159.18 on Monday. Then it fell almost in half, only to rise again to $ 147.98 on Tuesday. And then Tesla CEO Elon Musk tweeted about it (using that vocabulary that we mentioned), and the price rose 40% in the negotiations after the exchange closed. On Wednesday morning, it reached new highs, hovering around $ 315 per share.
The Reddit community also turned its eyes to the BlackBerry, trying to do the same. So far, they have increased their shares by more than double $ 6.58 when they started earlier in the year. On Tuesday, the stock closed at $ 18.92. As of Wednesday, it is hovering around $ 22.
There is also AMC. Reddit took aim at that, generating the hashtag #SaveAMC on Twitter as well. Its shares jumped from $ 2 per share last week to about $ 14 on Wednesday morning.
Here’s what you should understand about GameStop, AMC and BlackBerry.
How did this happen?
GameStop is one of the largest video game retailers in the world, but is struggling to stay relevant in the era of online sales.
Indeed, the WallStreetBets crowd created an artificial demand for GameStop and BlackBerry shares with their own money. There are 2.2 million members in the WallStreetBets community, although it is almost impossible to determine how many people are involved in the GameStop and BlackBerry schemes.
What happens is that when you buy a lot of GameStop shares quickly, the price goes up. This is normal. With GameStop, however, there are also many short sellers, or people who effectively bet that stocks will fall rather than rise.
But there is an obstacle. If GameStop’s price rises too fast, short sellers – people who bet on GameStop’s difficulties – are forced to buy even more shares to cover their losses. This further increases the stock.
That’s how we suddenly see GameStop’s value leap.
See too: The increase in GameStop shares was driven by the slang of Reddit’s WallStreetBets community. Here’s what it means
What is a short seller?
When people buy a stock normally, they are betting that it will increase or divide enough profits to make more money than they invested.
Short sellers, or shorts, do the opposite. Short selling with borrowed money and selling the shares, in the hope that they can make money if the shares fall in the future.
Imagine Ian Corp. is a public company and its shares are worth $ 10. A “sold” would borrow shares from Ian Corp. and sell them for $ 10. Their bet is that Ian Corp. shares they will fall below that – maybe to $ 4. If that happens, they can buy the stock for $ 4 and pocket the other $ 6.
If the shares of Ian Corp. jump to $ 25, the lender who made that bet possible can push the sale to cover your bet. This would mean that the seller would effectively have to buy the shares at the new and higher price.
When a bet is certain, betting against a company, they can win big money. But if they are wrong, they can also lose a lot more money.
There are other options and tools to bet against a company’s future as well.
GameStop inventory from January 19th to 25th.
Google Finance
How much money did GameStop shorts lose?
The losses appear to be enormous. On Monday, short positions appeared to have lost $ 3.3 billion in bets against GameStop this year, according to MarketsInsider. About $ 1.6 billion, or about half, of those losses came on Friday, when stocks jumped 51%.
It is also important to note that GameStop started the year as one of the most shorted companies in the market.
That looks like a lot of money
Yes, but what is perhaps an even greater indication of how dramatic these moves were, GameStop’s stock sales were interrupted during Monday’s trading because they were moving too fast.
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These wild swings aren’t going to go on forever, are they?
Part of what motivated this behavior is the popularity of retail investments, or when non-Wall Street traders buy and sell stocks. Stock trading apps, often free of charge, have made it easier for people to enter the market. And social media has helped people come together, encouraging each other to buy more and more shares.
“GameStop’s recovery is one of a series of attractive market moves to raise concerns among fund managers, some of whom say trading by individual investors is pushing stock prices out of fundamentals,” wrote Wall Street Journal on Monday.
How is Wall Street responding?
Big name trading apps like Robinhood, ETrade and others would have struggled to stay online amid all the hysteria. TD Ameritrade on Wednesday acted to restrict the sudden spikes in demand, “for being too cautious amid unprecedented market conditions.”
Nasdaq said it will halt stock trading if it finds a link to unusual social media activities. The company said it sees its role as a “self-regulatory organization” of ensuring that its markets operate in a “legitimate” manner. “Regulators kind of need to keep up with the technology that is now available,” Nasdaq CEO Adena Friedman told CNBC on Wednesday.
What do 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 commercial activity. BlackBerry reached an agreement with Facebook earlier this month over a patent dispute, although the terms were not disclosed.
Why are Redditors doing this?
There is the seemingly easy money aspect, which is attractive in itself, if you are comfortable with the risk. But some of them are also framing it as a crusade against Wall Street. “We are in a war,” posted a Redditor on Wednesday. “A war for the redistribution of wealth.”
Why did Elon Musk get involved?
In addition to being a prolific Twitter user, Musk has also recently discovered that he can direct people to the actions of various companies. He tweeted about how much he liked buying something for his dog on Etsy, and the stock skyrocketed. Now he tweeted about GameStop, and that stock jumped even more.
Should I try to get into the frenzy?
It is always good to consult a financial professional before making investment decisions.
Correction on January 25 at 17:52 PT: The explanation of short selling has been corrected to make it clear how the process works and that there are different ways to bet against the rise in a company’s stock price.