GameStop or Game-start?
In the past week GameStop has become the ‘talk of the town’. There is a pretty good reason behind the whole fiasco. This might seem like a fictional plot of a movie but it has happened. On one hand we have some great characters like Jordan Belfort, Michael Burry, who took the stock markets by storm. But in this case, there is some difference. The whole scenario has been presented like an uprising movement.
Therefore, it becomes essential to understand the whole story from numbers point of view as well as the impact it may have in the upcoming times. There is always a possibility of a butterfly effect and this can be a triggering factor. Anything can happen in the world we currently are. Let me take you through bit by bit instances in an understandable way.
Here is all you need to know about GameStop:
What is GameStop?
GameStop (Ticker : GME) is a fortune 500 company offering games and entertainment products over 5000 stores. It offers best selection of new and pre-owned video gaming consoles, accessories, game titles, etc.
Not only that, it also offers a wide variety of vinyl figures, collectibles, board games and more. Through its unique buy-sell-trade program, gamers can trade in video game consoles, games as well as consumer electronics for cash or in-store credit.
GameStop entered the eSports space in 2019 and launched GameStop Performance Center. This Center serves as the premier public headquarters where gamers can unite and share their passion for eSports.
Not only that, it dobled down on retail innovation by launching new GameStop Innvoation Store Labs to cultivate customer centric opportunities and bring video game culture to live in every neighbordhood.
The financials of GameStop depicts another picture. Last time the company made any net profits, it was in the year 2018. The situation has been becoming worse and worse ever since.
Have a look at the financials given below:
From the results one thing is evident that this is a company which is sinking. Looking at the business model, financials, and future of the industry we can conclude that GameStop is in a bad position.
So, what exactly happened to the stock of such company which created this big fuzz?
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What is all the fuzz about?
Simply put, the fuzz is about short sale transaction went wrong. Some big boys had planned to bring down GameStop by shorting its stock. In return, a group of investors started the movement to counter the effect and started buying the stock. Usually, in the stock markets going against the stream does not turn out to be profitable for retail investors like you and me but this was an exceptional case.
The buyer side overpowered, making the stock shoot up exponentially which resulted in a rally we have not seen in recent years. The big boys (few hedge funds) lost their bet of shorting the stock and had to take severe big blows financially. This got them enraged because this time they were loosing instead of retail investors.
The retail investors had hit a jackpot and were ready to encash their tickets. The next day when the investors woke up and tried selling their stocks to make the fortune, they found out that the brokers have put a selling restriction on the stock. As a result, people can only buy the stock but not sell it. This added fuel to the fire and started the debate of whether all of this was ethical, legal or in right faith.
To understand it better, have a look at the following numbers and trend in which the stock price has moved from January 7 — January 29, 2021:
Graph:
Data:
Looking at these pictures, we can clearly understand how the stock which was generally trading between 15 USD to 30 USD made its way up to 400 USD in just 2 weeks. Seems unrealistic, right! But it has happened.
What is the result? The big boys lost in Billions, whereas the retail investors made millions. What about the company? Honestly, the company has not made any significant profits out of this except the free publicity. We will need to wait for the financial results of GameStop to clearly understand whether any of this had any significant impact on the numbers.
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Is there really a problem?
Now, after understanding the background of this situation we can dwell in to whether whatever happened was a problem or not? Let us look at the individual aspects. We will look at this from hedge funds, investor’s, and broker’s point of view.
First, the hedge funds shorted the stock of GameStop. Shorting is allowed and these transactions are done on a daily basis. So there is nothing illegal about it.
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How shorting works:
Let me try and explain this in a simple way. When we buy a stock and expect it to go up so that when we sell we can get the profits. This is a long position. The buyer expects and anticipates the stock to go up.
On the contrary, what happens if I think that the stock price will come down? In that case I will be entering in to a loss making position where I buy the stock at a high price and sell it for low price.
Shorting, allows us to sell the stock first and buy it later. It is allowed in case you are expecting the stock to go down. In this case the broker borrows the shares and sell it in the market. As soon as the prices go down, the broker buys the stock and return it to the source from where initial stocks were borrowed.
The impact of a large long or short position can swing the stock price in any direction. Heavy long positions can take the prices up whereas heavy short positions can bring down the prices. In the case of GameStop, short positions were taken to bring down the stock price which were countered by the heavy purchase by group of individuals.
Investor’s point of view
Let’s understand the second aspect where the group of individuals went on a buying spree resulting in the sky rocketing of the stock price. From what we know and observe, people keep putting in such stock tips at various social media forums. Some of the news channels keep sharing stock picks. Which stock to buy, which to sell and which one to hold.
So, I don’t think there is anything wrong if a group of people start suggesting (on social media) to buy or sell a stock unless its done under insider trading.
Stock broker’s point of view
Stock brokers exist to serve as a bridge between retail investors and facilitate them. In return the brokers get their brokerage. Additionally, they also have the authority to implement measures on their platforms as and when required. In this particular case, the broker temporarily the sell of GameStop stocks.
Stock markets are volatile and that is a common knowledge. Stock brokers can impose restrictions if they find that the markets are too volatile and ‘investors can loose money’. In this case, one of the US based brokerage firm had to face the wrath because it added GameStop and 12 others on a restricted list.
Getting added to the restricted list means these stocks cannot be transacted in. Which got the investors furious. The broker can say it was done in public interest and all the other stuff. But unless there was a restriction from the stock exchange itself, I do not see any reason for putting it on a restricted list. This actually hampered the retail investors, as the hedge funds could buy and sell the shares freely.
Whatever the intention was, the broker did more harm (to the retail investor) than protecting them from volatility. Created unnecessary panic and specially not issued communications justifying the cause. This like keeping investors in the dark which most of the time they are.
What about the SEC?
Securities and Exchange Commission (SEC) is the regulatory body which overlooks all these financial matters related to companies and stock markets for the US. Where does SEC come in to the picture. All such matters are referred to the SEC for resolutions. Therefore, SEC has been requested to intervene and come up with a solution so that such instances can be avoided in the future.
After due diligence, the SEC will surely issue further guidelines with regards to such transactions or the purview in which stock brokers can impose restrictions. Just like SEC, every country will have their own agencies looking after the securities and companies. The main objective should be to safeguard public interest, ensure transparency and boost ethical practices in the market.
After all this I cannot clearly say which party is at fault. The ones who placed the short bet or those who started a buying rally or those who imposed restrictions. This is difficult to determine because everyone was doing the stuff in their legal boundaries. At last, hedge funds lost their money and even the retail investors could not cash in their fortunes because of the restrictions imposed by the brokers.
Can it happen in India?
All of this happened in the US and the question comes in to mind, whether anything similar to this can happen in India? In the past, similar things have happened in India where few companies got their stock prices rallied up or down due to several reasons. Mostly shady and therefore I would not count them in.
Looking at the current scenario where more learned investors are entering the stock market. The rate at which influence of social media is increasing, it will not take too long for such instance to get repeated across the globe.
In India, the people are more emotional which makes the stock market even more volatile. Due to this fact, we can assume that gathering a group of retail investors to fight the hedge fund bets will be difficult. Moreover, the regulatory agencies are more active and quick to take decisions in such matters.
Is it a Game-start opportunity for retail investors?
At the end, this what it all comes down to. Whether this can be constituted as a one time fluke or a new catalyst in the history of retail investors. If its the prior, we do not need to worry. But, if its the later, then we are looking at the dawn of a new era.
An era where retail investors can control the market. An era where big boys (hedge funds) don’t enjoy the liberty of manipulating the markets. Something new, something more liberal, democratic, and beneficial to the retail investors.
As much as it sounds empowering and energetic, I think this is a far fetched thought. The world may not be ready to adapt to these new changes. On an optimistic note, the rate at which our world is evolving no change is harder to get accustomed to.
To support this thought, we have the availability of technology, ease of trade and accessibility to the information at our fingertips. Making it convenient for the retail investors to enter and benefit from the market. All we can do, is hope for the best so that retail investors can get the same advantage like a hedge fund in practice and not in theory.
