GameStonk – Explained. Decoding the financial aspects of the GameStop manipulation.
- Neil
- Feb 28, 2021
- 4 min read
Updated: Mar 1, 2021
By Neil Sudhalkar.
Something that started off as a meme brought companies down to their knees. What is game stonk, and why is it so significant?
An article by Neil Sudhalkar.
Email: neilsudhalkar@thedailydosage.in
Some other articles by Neil: articlesbyneil@thedailydosage_in
This article aims to improve the knowledge of how financial markets work for teens aged 13-15. Part 2 of this article will talk about how a group of members manipulated the market as it will be too much to fit in one article.
Introduction
In today’s capitalist society, it is commonly believed that the big guys bully the little guys. It's usually this big guy who wins at the expense of the little guys. This January though, it was the little guys breaking up the big guys. But before we get into this, we will need to understand what exactly happened.
The What, the When, and the Why – Explained
In January of 2021, one stock saw one of the most epic and significant climbs in history. A group of independent investors associated with an online group on reddit called r/wallstreetbets, took a company which was a known loser and made history. The company was gamestock, and because the stock went so high, it became a meme and hence people called it gamestonk. The little guys, disrupted trading and made major investment firms fall onto their knees. This is the story of GAMESTONK.
The first thing that we need to understand in order to solve this puzzle is why did these groups of investors take part in this and how this whole meme went about. The stock market works on a simple formula of demand & supply. It is really simple and easy to understand; whenever there is a surplus or a lot of stuff, it means that the supply is high, and whenever there is less stuff the supply is low. So here is how it goes. Whenever the demand is high and the supply is low, the price of an item goes up. Similarly, when the supply is high and the demand is low, the price of an item depreciates. Let’s take the example of a sweater. When it is winter and the temperature is low, many people need to buy a sweater and hence the demand is high, which causes the price of the sweater to go up. Similarly when the temperature is much higher and people don’t need as many sweaters, the demand is low and the supply is moderate, and hence the price of a sweater depreciates. The stock market works in a similar way! The more demand there is for a stock in a company, the higher the price is per share. So you see, imagine that a stock is being bought a lot by investors, the demand is high and the stock is bullish. Similarly, imagine that a company is losing money and investors are selling their stocks the stock has lesser demand and hence the price an investor pays per share depreciates, this means that the stock is bearish. I will represent the market sentiment in the words said above in the terms bullish and bearish which reflect the same.
What is game stop?
Gamestop is a retail company which operates mainly in the U.S which sells video games and gaming consoles in brick and mortar stores (physical retail outlets). As people started to prefer shopping for video games and consoles online; the company started dying and was operating at a loss making it a loser.
What is stock shorting?
Stock shorting is a way to earn money in financial markets. Let’s start it off with an example. Normally, you would put money in a stock and make a calculated risk in which the desired outcome is for the price of shares to rise. Stock shorting is the polar opposite. Let’s look at how this works with the major hedge funds which betted on gamestop going down. The process happens in 4 parts which are shown below:
1Go to a stock broker
2 Rent a stock (Terms usually include returning the stock with x% markup)
3. Sell it off
4. Wait - Hope for the price to go down
5 Buy the stock at a cheaper price
6. Return to broker with ‘x’% markup
My visually represented notes:
(Please excuse my handwriting, these are just my rough notes)
Something similar happened with GameStop. A youtuber by the name “Roaring Kitty” thought that there is a lot of shorting interest on GameStop and felt that the stock was undervalued.
R/wallstreetbets saw this as an opportunity to earn money as they flocked to buy the stock and eventually due to the influx in demand, the price of the stock went up.
The people in r/wallsteetbets are rather young and have a personal grudge against large corporation which made this to happen in the first place.
The video by Roaring kitty:
In part 2, I discuss wall street bets & talk about how coordinated small scale investors can manipulate the stock market.
Stay tuned for part 2.
Release schedule for articles https://docs.google.com/spreadsheets/d/1-aSFfI3BJvG2QlLgnjafJEl6x7ZjAP0ZCl_uVixlq4U/edit
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For further reading:
What is happening to GameStop? https://abcnews.go.com/Technology/wireStory/wall-street-david-goliath-story-goliaths-fall-75514180
What are the chances that something similar be pulled of here in India? https://www.livemint.com/market/stock-market-news/can-gamestop-frenzy-happen-in-india-11611930232304.html
Learn more about stock squeeze https://qz.com/1963440/a-reddit-wallstreetbets-user-on-why-he-bought-gamestop-stock/
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Contact the author of this article:
Neil Sudhalkar - neilsudhalkar@thedailydosage.in
Suggest a topic!
Hi! Please check out part 2 of the same article here: https://www.thedailydosage.in/post/r-wallstreetbets-understanding-how-tech-has-changed-the-world-of-small-scale-investors
Good one Neil. Best wishes for many more.
Fantabulou... very well articulated 👏👏Keep it up 👍
Superb Neil!!!
Excellent analysis Neel. Can see that so much of research has gone into writing this. Too good. Keep up the good work.
Bhuvana Swaminathan.