What Happens When GameStop Stocks Crash?

At one point or another, many younger millennials may recall walking into GameStop to trade a disk for a couple of cents or perhaps just walking by it in a mall. By now, it’s no secret that the stock prices have increased drastically, but…why?

As companies like Amazon and online shopping at large retail stores such as Walmart and target increased, the presence of Gamestop began to fall behind, and over time became more and more irrelevant. Regardless, one crazy, very lucky investor started to pour thousands of dollars into the stock market of the failing company, right when it was at its lowest point. And then, in 2019, a renowned investor also started to invest because he too saw the value. This value he saw was because Microsoft and sony were releasing next-gen consoles which carried the rebirth of disk video game consoles. And, as many know, disks are the field where GameStop thrives. But, in 2020, as many stores shut down due to covid, GameStop found themselves to have a 519% increase in online sales. Later, in August, the founder of Chewy(online pet food) took a 9% stake in the company and announced that he would try to turn it into an amazon rival. Then, as if things didn’t already seem crazy enough, Microsoft and Gamestop announced a Multiyear partnership. Soon, digital sales started to rise, so Ryan Cohen(founder of Chewy), increased his stake to 13%. But, regardless, more shares were shorted than actually existed in the market for sale. On top of that, 90% of the stockholders thought that the stock would go down. But, they were wrong. This combination was basically a perfect storm, and as soon as any good news comes out than the stock value would rise exponentially. This is a term known as a short squeeze which is a “rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals.” Because everyone thought the company was in such hot water, as soon as good news came out, this forces “short sellers” (occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money) to buy back their shares a higher price. And before you know it, everyone does the same thing, which made GameStop prices skyrocket. Now, short sellers cannot actually find anyone who wants to sell their stock, because the buyers know that the longer they hold out, the more money they make. This also causes the short sellers to lose thousands, even millions.

So, the crazy investor we talked about in the beginning, is now bathing in money, because his stocks are worth about 22 million dollars. Regardless, what’s happening right now is crazy, and you could make millions, or lose billions. It’s a massive gamble, and personally not one I’m willing to take.