6 Takeaways from the GameStop Stock Market Drama

by Diana Drake

Lots of investors were watching the war on Wall Street in 2021 involving the stock of GameStop, the retail store in the mall that sells games, consoles and and even drones. As of the end of the last week in January, shares of the once-humble little GameStop were trading in the triple digits around $190, though the price had dropped 40% from the previous day when many platforms put restrictions on the stock. Midweek, GameStop’s value was up by more than $10 billion.

With the help of analysis from the Wharton Business Daily radio show on SiriusXM, here are six things that investors can learn from GameStop’s crazy ride:

  1. The players. This battle is between retail investors – everyday investors – and professional investors, or hedge funds, which pool investment money from wealthier investors in hopes of making their money grow. Wall Street Bets, a small group of retail investors on Reddit, is behind some of the GameStop stock spike, reportedly taking on hedge funds and Wall Street for short selling the GameStop stock.
  1. The short sell? This is a trade that allows investors to bet on the price of a stock going down, rather than up. “With short selling, an investor is selling shares before they buy them,” explained Sasha Indarte, an assistant professor of finance at the Wharton School, University of Pennsylvania. “This type of transaction is happening in reverse from a typical transaction. You’re selling before you buy, and in order to make that happen you have to borrow shares. When you’re doing these steps in a different order, you’re still hoping to sell high and buy low. But now, because you’re selling before you’re doing the buying, you hope that the stock price is going to fall over time.”
  1. A tricky move. Short selling is more common among investment professionals than everyday investors because “the risks are potentially much higher when you short sell a stock compared to when you are just outright buying and later selling a stock,” said Indarte. In other words, the chances are higher that you will lose the money you invest. But if you don’t, the gains can also be higher.
  1. Squeeze play. Headlines are referring to this battle as a “short squeeze.” Companies can have what’s known as “high short interest” when analysts are pessimistic about certain things happening with the business. GameStop fit that profile. “Gamestop’s business model might face some challenges in a year like 2020 and 2021 during a pandemic when more people are buying online rather than going to stores in person for their shopping,” noted Indarte. “Investment professionals and hedge funds were pessimistic so they took out these short positions. When there’s a lot of short interest, what can happen is that when there’s a bit of a price increase, you can get more momentum for further prices increases that end up further hurting the short position (remember, you bought the stock betting it would go down). If you’re losing a lot of money on a short position, you may have to close out some of it. Now to close [the transaction], since you already sold, you’re now going to have to buy. And if there’s a lot of buying that’s being induced by this price increase, that can further increase the price.”
  1. A bad move? Is there something wrong with the effects that shorting can have on a company? While the battle between small and big investors might suggest it, not everyone agrees. “One view is that it’s a trade that allows people to act on their beliefs,” said Indarte. “Similarly, if you’re buying a stock, you could stop buying the stock and that’s going to have an effect on the price, as well. So, it’s not clear that the shorting itself — the fact that trades are being executed in that way — is necessarily bad. And the option to short versus buy gives investors more flexibility and thus should mean that the prices are going to be more informative and reflect more of the beliefs and information of investors.”
  1. The end game. While the portrait of the retail investor taking on Wall Street is dramatic, even compelling, it’s likely not going to end well. “The hedge funds that were engaging in the short-selling activity are feeling the most acute pain right now,” because the price of GameStop is high — 200% higher than it was at the beginning of the week, said Indarte. “We’re going to potentially see more pain felt by the retail investors that are bidding up the price of GameStop right now. It’s hard to justify the prices that we’ve been seeing for the company based on the company’s fundamentals (things like cash flow that analysts study to understand the longer-term potential of a stock). I wouldn’t expect the stock price to stay this elevated. It’s difficult to think of a potential change in fundamentals at the company that would result in such a high increase in its valuation.  It looks like it potentially could be bubble-like when it’s not linked closely to fundamentals. What that means is that when the buying activity slows down, some of the people that opened up those positions might experience losses later on. So, we might end up seeing losses both on the hedge fund side and also the retail side.”

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Conversation Starters

What does it mean to short sell a stock and why is this not as common among typical retail investors?

What are your opinions about the battle playing out on Wall Street? Do you feel that hedge funds deserve to lose money or do you think short selling is a viable option?

8 comments on “6 Takeaways from the GameStop Stock Market Drama

  1. Learning about the unprecedented anti-hedge fund protest through inflating stock prices of a video game store led by a group of Reddit users is intriguing, to say the least. When I first heard about the news, however, it made me truly realize the power of unity against a supposed superior institution or ideology. And although this activity seems comical, the same human behavior can be seen in other more severe and urgent topics.

    The association between this event to the Black Lives Matter Movement came almost immediately to mind when thinking about the unity of power. For example, would the court have charged Derek Chauvin with second-degree unintentional murder, third-degree murder, and second-degree manslaughter without social media attention and global protests? In another sense, why did the police department overlook his record of previous complaints? How about in the case of Ahmaud Arbery? Breonna Taylor?

  2. Reddit is a social media platform with users mainly concentrated in Gen Z. With this said, I think the event alludes to a pivotal emerging business trend, and that is the use of social media as a tool for change making among Gen Z. This generation has grown up amid a slew of social movements whose primary method of communication is social media. Movements such as #BlackLivesMatter, #MeToo, and #NoBanNoWall have given rise to huge amounts of awareness and change. Not only have these movements succeeding in educating millions of people about the issues at hand, but they have also helped create a number of policies and sparked political action against issues such as police brutality, discrimination, sexual assault and harassment, refugee bans, and deportation. Gen Z has been an active member in protesting against said issues and will likely continue to be in the future. In addition, many businesses have followed Gen Z’s lead by protesting social issues on social media and fundraising for these causes. I think it’s safe to say that the trend of Gen Z’s social media movements will play a vital role in future of our society and the business world.

  3. Short selling is an investment or trading strategy that goes over on the decline in a stock or other security’s price. But short selling is advanced strategy that should only be undertaken by experienced traders and investors. Its not common among typical retail investors because when investor goes long, they can lose a maximum of 100% of their investment. This is because the value of their investment could turn to zero if the company files bankruptcy.

  4. Short selling happens when an investor borrows a security and sells it on the open market with the plan to buy it back later for less money. There’s no limit on how much money you could lose on a short sale so many investors are turned off by it. I think the battle that was played out in wall street is karma. I think that hedge funds deserve to lose money because they like to bet on the downfall of large companies which affect innocent workers who are laid off as a result.

  5. Short selling happens when investors borrow a security and sell it on the open market with the plan to buy it back later for less money. There’s no limit on how much money you could lose on a short sale so many investors are turned off by it. I think the battle that was played out in wall street is karma. I think that hedge funds deserve to lose money because they like to bet on the downfall of large companies which affect innocent workers who are laid off as a result.

  6. Short selling is the practice of investors borrowing a securities and then selling it on the open market with the intention of later purchasing it at a lower price. Since there is no cap on the amount of money you can lose on a short sale, many investors avoid them. I believe that the conflict that took place on Wall Street was karma. Because they enjoy betting on the failure of significant corporations, which has an impact on the innocent individuals who are laid off as a result, I believe hedge funds deserve to lose money.

  7. Short selling is trade that allows investors to bet on the price of a stock going down rather than up. This probably is not as common among retail investors, because regular retail investors buy the stock I think.

    The battle is interesting I guess, I’m not really into stocks but I guess it’s impressively they were able to get game stop to have its value raised to 10 billion. I’m honestly not really sure because if hedge funds is pulling in money from wealthier investors, that’s not the persons money to begin with so taking someone else’s money isn’t a good thing, when it comes to shortselling I guess it’s an option because all you’re doing is betting . But the person is probably more likely to lose their money that way from the bet

  8. Short selling a stock is when you trade and an investor obtains shares off a stock from a broker and sells them.This is not as common among typical retail investors because they prefer straightforward long term investment. In my opinion the battle playing out on Wall Street is a issue and it causes risk management. They deserve to lose money.

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