Finance Finance News GameStop stock has surged, due to WallStreetBets Reddit users. Here’s what you need to know

GameStop stock has surged, due to WallStreetBets Reddit users. Here’s what you need to know

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It’s a story with all the makings of a Hollywood blockbuster: The little guys beat the corporate titans at their own game, expose hypocrisy and get insanely rich in the process.

But that’s not where the story ends for GameStop, whose stock is surging thanks largely to a giddy mob of “degenerates” on Reddit.

Now, the corporate titans – Wall Street hedge funds, commentators and regulators – seem poised to fight back, calling the situation “systematically wrong”.

Here’s what going on with GameStop and where the story might go next.

Wait … what is GameStop?

GameStop, listed on the New York Stock Exchange as GME, is a chain of video game shops in the US.

You’ll find them in suburban shopping centres across the country, and they are the parent company of the Australian chain EB Games.

In the past six months, the company’s stock has been steadily rising.

Initially, this was odd, given the pandemic and the recession.

“The model for buying games in a brick-and-mortar store is just not feasible as the world has revolved to downloads of games on the newer consoles,” Sahak Manuelian, the head of equity trading at Wedbush Securities in Los Angeles, told the ABC.

“So, this should make sense intuitively – if they don’t adapt their business model, the future looked bleak.”

But after trading around $US4 in mid-July, GME was up to $US12 by October, and $US18 by the end of December.

Then things really took off.

Since January 1, despite no real change in the underlying business, GameStop’s share price has surged 1915 per cent (from $US17.25 to $US347.51).

It has now become clear that the surge in demand for GameStop stock has been driven by an enthusiastic bunch of individual investors, many of whom hang out on the subreddit r/WallStreetBets.

The excited masses are following their ‘king’

WallStreetBets is a place where users post their stock holdings and talk about their trades.

A year ago, a user by the name of DeepF***ingValue (DFV) posted a screenshot of a position he had taken in GameStop.

He had spent about $US50,000 on stock in his initial investment.

“This dude should sell now,” another user wrote in response.

“[Eight five per cent] of wallstreet thinks [GameStop are] gonna miss earnings and so does earnings whispers. Plus either way [they’re] gonna be negative earnings for first time. That ship is sinking.”

DFV didn’t seem fazed: “Damn thanks for the advice.”

Since then, and increasingly in the past few weeks, DFV has been posting his ever-more-valuable position – and demonstrating his uncanny foresight. (Deep F***ing Value has yet to respond to an ABC request for comment.)

The subreddit is now electrified.

As the stock price rose dramatically, driven by other users wanting a piece of the action, there were desperate calls for regular updates from DFV, now being referred to as “king”.

By mid-January, DFV’s position was worth $5.7 million.

“Just incredible. I wish I had 1/10th of his conviction,” one user wrote.

Another said: “We’re all here dreaming of hitting the big one and quitting the rat race and he f***ing did it.”

According to DFV’s January 27 post, his initial investment of $50,000, later upped to about $700,000, is now worth $US47 million.

This one experience is emblematic of others.

Some users have reportedly been able to pay off their college debt by cashing out a small amount of stock bought only weeks ago.

And the hype is spreading to Nokia, BlackBerry and other companies, with Redditors clearly enjoying the lulz that comes with propping up stocks the market otherwise wouldn’t favour.

Driving the demand seems to be not just a desire to get rich quick but to troll Wall Street’s institutional investors, who have been betting GameStop stock will go down (known as shorting) and who can be dismissive of individual or “retail” investors.

Wait, shorting? Explain that to me like I’m five

When you buy shares in a company, you’re usually betting that it will become more profitable over time. So they’re going “long” on the stock.

But if you believe a company’s shares will tank, you can place a bet on its declining fortunes (“shorting” the stock, in other words).

Basically, it means you’re borrowing the shares at their current price and selling them to others (even though you don’t own them).

If your hunch is correct, and the share price falls, you can purchase them back from the market at a lower price. You would have made a profit in this situation.

Then you can return the shares to the original lender, and pocket the windfall.

If all goes well, that’s how you make money as a “short seller” – a move most famously depicted in the The Big Short, the Adam McKay movie based on the Michael Lewis book.

That sounds … risky

It can be.

Hypothetically, if you short Afterpay for $50, and it announces a surprise profit (taking its share price to $500), then you’re going to lose $450.

If you make the wrong bet, there are ways to mitigate your losses. If the company’s share price suddenly surges, the “short seller” can buy those shares back at a slightly higher price.

For example, you decide to short Westpac at $20. But its share price surges to $25 soon afterwards.

You might decide to wear the $5 loss, rather than risk an even bigger loss – especially if the bank’s share price climbs even higher.

However, when a lot of buyers are shorting a specific company (let’s say, GameStop) and its share price shoots up unexpectedly, that will trigger a “short squeeze”.

What is a short squeeze?

That’s when “short sellers” – realising they’ve made the wrong bet – swarm in to buy more shares (at a higher price than they initially wanted) to “return” the stock to the original lender.

This leads to increased demand for the stock, lower supply, and its price to jump.

This is precisely what happened with GameStop.

Its shares skyrocketed after Redditors discovered some big Wall Street hedge funds were trying to make a quick buck on GameStop’s falling share price.

So the Redditors banded together and bought heaps of GameStop shares to drive up its value – and burn the hedge fund traders.

The “short sellers” were forced to buy more shares to mitigate their losses, which drove the shares even higher (to the benefit of the Redditors).

Where does this end?

It’s not clear.

There are calls for DFV to buy the mansions of famous hedge fund owners and turn them into GameStop outlets.

One user has already come up with possible titles for the inevitable Netflix film: Harold and Kumar Go To Whipe Citadel, Breakfast Then Bought Tiffany’s.

On Thursday, r/WallStreetBets, whose members call themselves “degenerates”, was briefly made invite-only – obscuring the subreddit for a time before it returned. The subreddit’s Discord chat server was also banned for alleged hate speech.

Redditors might soon cash out and score a windfall, though that would cause the price to collapse, and holding out has been heralded on WallStreetBets as a way of sticking it to the big hedge funds.

“It’s a pyramid scheme insofar as the share price appreciation is not based on fundamentals that improved each of the last several days,” Michael Pachter, a managing director at Wedbush Securities, told the ABC.

“Rather, the stock went up because each buyer felt that someone else would come along and pay more for the stock in the future, regardless of fundamentals.

“Eventually, an insider will sell or the company will capitalise on the high share price and raise capital, at which time the bubble will probably burst.”

Until then, investors and other figures connected to Wall Street, where at least one hedge fund has reported a significant loss as a result of the short position it held, is considering its options.

“This is certainly on my radar,” William Galvin, secretary of the Commonwealth of Massachusetts, told the magazine Barron’s.

“I’m concerned because it suggests that there is something systemically wrong with the options trading on this stock.”

He also said that erratic movements could be dangerous for small investors, who might borrow to buy stock and get caught out at the top of the market.

The CEO of the Nasdaq stock index – a separate market to where GameStop is listed – said it had technology that could monitor “chatter on social media channels” and halt trading if it looked like there was a rise that was “not based on news, not based on fundamentals”.

But in the fevered back-and-forth chats between WallStreetBets members, many see their acts as heroic – and the results no different to the kinds of volatility Wall Street investors have themselves been causing for decades.