Sunday, June 26

GameStop, a popular revolt on the stock market

GameStop, a popular revolt on the stock market

The game store is currently one of the most traded securities on the Stock Market.

Photo: Tannen Maury / EPA / EFE

GameStop is a video game store found in shopping malls. E-commerce and broadband have called into question the future of shopping malls and GameStop. With the pandemic, the crisis is final.

Now, GameStop has another life: as a public company, its shares center the pulse that the union of millions of small non-professional investors is throwing at the powerful hedge funds run by professionals.

The drama of this pulse has lasted for several weeks, but in the current one the situation has been blown up. The company has appreciated 1,200% since the beginning of the year thanks to small non-professional investors who have bought securities to harm hedge funds that were betting on the fall in their valuation. Volatility has skyrocketed in the market where heavy losses have recently been collected. A hedge fund, Melvin Capital, has had to close its positions in this security with heavy losses and small investors have made money but could also lose a lot.

Known GameStop and the play, it is convenient to know more about the other protagonists of this story that is turning strong in the markets and is presented as the revenge of investor populism.

Hedge funds are hedge funds that normally operate with a lot of leverage, that is, they borrow a lot of money to make investment bets with their clients’ money. Clients – including pension funds – invest at least one million dollars and hedges funds charge them a lot of money: an annual management fee of 2% of assets and an incentive fee of 20% of profits .

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When funds bet on falling stocks, they trade quickly on borrowed securities that they pay back quickly to make money while they lose value. When stocks rise despite them, as is happening with GameStop, then they lose money and often need to cover their losses by divesting in other stocks and buying the same stocks they were betting on to recover money, thus helping to drown their bearish bet .

Non-professional investors are those who are using their savings or income to buy and sell stocks through platforms such as Robinhood, TD Ameritrade, Webull or Interactive Brokers, among others. These platforms have made it easy. You can buy and sell stocks and options (for sale or purchase) through an app with small amounts. And then there are forums for these investors. Where the current situation has cooked up is Reddit’s Wall Street Bets, with 3.5 million users and enthusiasts cheering them on like Elon Musk.

The forum was temporarily closed on Wednesday and GameStop’s shares were delisted for various periods of time due to volatility. That day the losses on the stock market were bulky and shares of other companies such as AMC, Blackberry, Nokia and even American Airlines and Bed, Bath & Beyond were following in the wake of GameStop events.

Meanwhile, from Friday the 22nd to Wednesday the 27th, the stock of this video game store increased by 464%. A stock that barely traded above $ 4 a year ago was hovering around $ 347 on Wednesday.

Very bad news for hedge funds with bearish positions (shorts). A good number of them are recording heavy losses.

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Thursdays with restrictions

On Thursday, however, the situation turned around. GameStop and other companies in this stock market battle were trading sharply down due to the fact that the apps and platforms that have given entry to small investors closed the possibility of investing in these securities, unleashing strong criticism even in Washington.

Alexandria Ocasio Cortez said that the decision to close access is “unacceptable” and that it was necessary to know the reasons when hedge funds can continue to invest. Republican Senator Ted Cruz agreed with her. The finance committee is opening an investigation.

Thomas Peterffy, president of Interactive Brokers, explained on CNBC that he had closed access because he was concerned about the integrity of the market. Citadel, one of the big funds issued a statement saying that they were not responsible for the shutdown of popular platforms. In the same chain, Senator Elizabeth Warren regretted that the market has become a game, “in a casino”, a market that is neither honest nor transparent.

This Thursday, after the restrictions, the indices returned to gains again, leaving behind three days of strong losses and volatility. And GameStop lost just over 44% to close at 193.60 per title. The story continues.

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