GameStop Stocks Fall 60 Percent After Restrictions
Amateur investors are responding with outrage after trading platforms restricted buying of shares in GameStop and other companies.
The moves by Robinhood and Interactive Brokers follow days of frenzied trading that led to massive gains for some stocks.
Shares in GameStop dived by as much as 60% after the restrictions.
It is the latest twist in a battle that has pitted amateur investors against Wall Street giants.
Major hedge funds had bet billions of dollars that GameStop’s shares would fall.
They have faced major losses after amateurs, swapping tips on social media sites such as Reddit, drove up the share price by more than 700% in a week.
Other firms, such as AMC Entertainment, Koss Corp and BlackBerry, also saw sharp gains. They were embraced by day traders after hedge funds bet against them.
The activity has drawn questions from regulators, who are monitoring trading amid fears of illegal actions.
But the amateur investors say they are just playing Wall Street at its own game.
In online forums they discussed legal action and accused Robinhood and other brokerages enacting their own form of market manipulation by restricting purchases of certain shares.
Why have GameStop shares surged?
Key to what’s going on is “short selling” or “shorting”, where a big investment company such as a hedge fund tries to make money by betting that a company’s share price will fall.
The hedge fund borrows shares in a company from other investors (for a fee) and sells the shares on the markets at, for example, $10 each, waits until they fall to $5, and buys them back. The borrowed shares are returned to the original owner, and the hedge fund pockets a profit.
GameStop – which saw heavy losses last year and was described as “failing” by one big investor – is the most shorted stock on Wall Street. Some 30% of its shares are thought to be in the hands of hedge fund borrowers.
However, in the last week, amateur investors who follow the Wall Street Bets forum on Reddit have poured money into buying the company’s stock with the aim of pushing up the price.
If the price rises dramatically, short sellers face big losses and they need to buy back the shares they have borrowed quickly to prevent bigger losses – a process known as covering.
However, buying back the shares only adds to demand for the stock and pushes its price higher still.
Amateurs aren’t the only ones getting in on the action.
This week, for example, private equity firm Silver Lake Group, which had loaned money to AMC Entertainment, converted its bonds to shares after the surge in the firm’s prices, a swap worth hundreds of millions of dollars.
In the US, anger over the trading restrictions united politicians whose stances typically sharply diverge.
Senator Sherrod Brown, a Democrat who is taking over as chair of the banking committee, said he would hold a hearing about the “state of the stock market”.
He said: “People on Wall Street only care about the rules when they’re the ones getting hurt.”
What is GameStop?
GameStop is an American high street shop that sells games, consoles and other electronics.
With fewer people out shopping due to the Covid-19 pandemic and most games being sold online, things weren’t looking great for GameStop.
People who buy and sell stocks often bet on which companies won’t do well in the future.
They borrow shares in the company and sell them, with a promise to buy them back at a later date.
If you’re sure the company will lose value, you’d make a profit when you buy them back and the price has fallen.
This is a massively simplified explanation of something called shorting, or short selling – words you might’ve seen cropping up in your feeds in the last few days.
GameStop was one of the companies that loads of hedge funds (companies who do these bets) had bet on to lose a lot of value.
More than four million people are on Reddit, usually discussing stocks and shares and where they’re going to invest money.
But huge numbers of people in the wallstreetbets Reddit forum swapped tips and bought shares in GameStop.
The demand raised its share price massively, which nobody saw coming, and everyone who had banked on it dropping in value had to buy their shares back.