What is Gamestop? Background of game retailer whose stocks have soared in Reddit frenzy - and short selling explained

Hedge funds such as Melvin Capital, have lost out, while casual day traders have made significant sums of money

The Gamestop short squeeze has been the talk of Wall Street in recent days (Getty Images)

A group of Reddit users have been the talk of Wall Street recently after they made millions betting against short sellers.

The actions of the followers of subreddit WallStreetBets has seen the stock price of Gamestop rocket from $20 in early January to $350 by close of trading in New York on Wednesday 27 January – an increase of 1,744% in a matter of days.

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Shares slipped by 40% on Thursday as online platforms such as Robinhood imposed restrictions due to “significant market volatility”. However on Friday stocks have been soaring again as restrictions were lifted, and Gamestop looks set to regain the $11bn it lost.

The increase in price is little if anything to do with the performance of Gamestop, a video game retailer in decline. By chance the company’s stock been chosen by online traders as a battleground to take on short sellers.

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What is r/WallStreetBets?

r/WallStreetBets is a subreddit – an online community hosted on Reddit – of casual traders who play the markets and, as Vox puts it, treats each investment “like a spin at the roulette wheel than a long-term strategy to build wealth” with strategies suggested by posters often all or nothing ventures.

The subreddit has over 1 million subscribers and is billed as the “Wild West of investing advice”.

The page has a history of delivering both successes and failures to followers.

What is Gamestop?

Gamestop is a US video games retailer with 5,000 shops across the country.

Due to the pandemic, the decreasing popularity of high street shopping and the increasing popularity of digital downloaded games the retailer has seen a decline in popularity in recent years.

The declining company has seen it become a popular target for short sellers who bet on the price of a stock going down.

How did Reddit users increase the stock price?

Followers of r/WallStreetBets have had their eye on Gamestop for a couple years now.

The arrival of investor Ryan Cohen, a reputable investor typically known for making safe bets, on the board of Gamestop, inspired confidence in the stock.

When it became apparent that the company was heavily shorted, a band of subscribers realised that if they worked together they could make money from the short sellers.

They did this by orchestrating a short squeeze against short sellers.

According to Investopedia, a short squeeze “occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses.

"Their scramble to buy only adds to the upward pressure on the stock's price.”

The behaviour and rhetoric of short seller Andrew Left of Citron Research has also contributed to the stock’s climb. In a video, Left said “we understand short interest better than you and will explain,” before ridiculing WallStreetBets users for investing in the “failing mall-based trader”.

Left’s rhetoric led to Redditors buying more stock out of spite which led to the stock price increasing further.

How much has Gamestop’s value increased?

In April following the announcement of mass closures shares in Gamestop could be purchased for just $3.25.

In pre-market trading on Friday 29 January, stocks had hit $379.

The value of the business was $1.2 billion in 2020, and today the company’s chief executive George Sherman has shares worth around $894m.

The short squeeze has severely impacted the fortunes of some hedge funds with Melvin management down 15 percent in the first three weeks of 2021.