CLEVELAND — If you’ve scrolled through social media websites lately, you’ve probably been hearing a lot about GameStop, the physical video game retailer.
But it's not about a new video game release, it's about the growing value of the company’s shares on the stock market and the pressure that growth is putting on Wall Street.
Right now, GameStop is one of the most highly-traded stocks in the United States - up more than 1,700% since the beginning of January.
But for years now, the company has been struggling as sales at online retailers surge.
“GameStop’s performance financially over the past several years, median income has declined pretty significantly,” said Keith Beverly, the managing partner and chief investment officer at investment advisory firm Grid 202 Partners.
So, why have GameStop’s stocks skyrocketed in price?
Beverly said it all started with a stock market concept called “shorting.”
“When you short the stock, you're really borrowing it and you don't own the stock,” Beverly said.
“Shorting” is when investors bet that a company’s stock price will drop, and then borrow and sell shares of that stock hoping that when it does finally drop they can buy the shares back cheaply and pocket the difference.
Several hedge funds took that risky bet with GameStop hoping to cash in, but it hasn’t quite worked out.
Users on the popular Reddit community WallStreetBets noticed the large number of short trades against GameStop — 140% of all the shares the company had issued — and rallied the rest of the online community to buy as much of the company’s stock as possible, using Robinhood, a free stock-trading app, and other digital brokers made for everyday people who want to invest in the stock market, known as "retail investors."
Driving up the price of a heavily-shorted stock can trigger what's called a “short-squeeze.”
“Reddit users are holding onto those shares. And by holding onto those shares, they're not able to sell them back to anybody. People keep buying higher and higher. So there's no shares for these firms to buy at a lower price,” said Gregory Steinberger, a student at Baldwin Wallace University and the chief investment officer of the school’s investment club. “So there’s basically a war between the Reddit users and these hedge funds.”
This isn't the first time a short-squeeze like this has happened.
"In 2007 in Europe, with Volkswagen where the stock price went up 10,000%," said Case Western Reserve University Banking and Finance Professor Gregory Harmon. "And it happens, and then it collapses back quickly and then, if you look at the chart of the stock price, a year later, you see this weird blip and you kind of forget everything that happened. So it will settle out. It will calm down."
Steinberger and his classmates have been watching the battle play out, trying to figure out what this means for the stock market.
Some hedge funds have already lost billions.
“It's kind of hard to tell where this is going to go in the long term effects of this. Currently, it's messing with a couple of different trading platforms,” Steinberger said.
Thursday, Robinhood restricted the trading of GameStop and other stocks. Soon after, it was hit with a class-action lawsuit claiming it was manipulating the open market.
Can the GameStop short-squeeze affect your personal finances?
Beverly said this situation won’t have a huge financial effect on the population at large, but it's a good idea to check your retirement accounts, like a 401(k) or a 403(b), to see if there are any holdings in companies affected by the short-squeeze.
“A lot of times you'll have mutual funds or exchange-traded funds where you may want to go in and see if the holdings - if GameStop and AMC is another one - these are holdings within your funds just to get an idea of if you have some exposure to them,” Beverly said.
“You can go into the fund's prospectus and read up and see what the holdings are. You can see if GameStop or, you know, one of these companies was one of the companies that you actually have a position to see what your exposure might be,” Beverly said.
Beverly said a drop in price for one of those stocks could affect your accounts, but only to the extent of the amount of holdings you have in a particular company, like GameStop.
“So if you're invested in a fund and it has a 10% stake or 10% allocation to GameStop, and now you have $100,000 dollars in that fund and that essentially means you have $10,000 in GameStop. So that would be your exposure to GameStop,” Beverly said.
“You can go in and look and look at the funds and documents, and see what those holdings are, at least as of now, the most recent period for when they have to release their statements. That's something you can pretty readily go look up and do research on and then you can see how it might affect you personally,” Beverly said.
Should you invest yourself?
As that situation continues to change day by day, Beverly is warning people to be smart with their investments.
“Tread very carefully and do your due diligence, because there's going to be very wild market movements,” Beverly said. “I think GameStop is down 50% or 30%. It's been bouncing all up and down the charts the past several days. So you'd have to trade with a lot of caution if you want to participate in those particular stocks.”
Harmon said most would do well to avoid the market while it's so volatile.
"If you're an average investor that doesn't have the time to sit at your screen and trade every 10 seconds, you should probably just avoid it and stick with the indexes or stick with the big dividend-paying stocks or whatever it is that is your philosophy," he said. "And just avoid the latest craze. It'll be gone in a few days."
If you're already invested, or still considering jumping in, Harmon has some more words of caution.
"What I tell students and what I tell investors in my accounts is that you need to go into every trade with a plan," he said. "You can't just think that you're going to follow some guy on Reddit that says, 'Hey, let's use our diamond hands and go in and get GameStop and drive this to the moon and print a lot of rocket emojis on Reddit.' That's not a plan. Know why you're getting into any position, any stock that you're going to buy. I know why you wanted to know how long you want to be in it. I'm not talking about do you want to be in for six months or two years? But will you take profits at a specific price level or will you stop taking losses at a specific price level and trade according to that?"
The Securities and Exchange Commission and the White House said they’re monitoring the GameStop situation.
For more, watch a Facebook Live Q&A with Professor Harmon below:
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