As of late, GameStop has been the talk of the town. In fact, it's even going to be the topic of a Netflix film! Read on to get a better grasp of what happened early this 2021 as we interview finance experts Wick Veloso, Hans Sicat, and Mica Tan.
The US stock markets had been overwhelmed and shocked by an immense uptick in price and demand for the what-once-was dwindling GameStop stock. Wick Veloso, Tatler 400 lister, president of Philippine National Bank (PNB) and previous country manager of HSBC, explains: “In January 2021, a short-squeeze of American video game retailer GameStop (NYSE: GME) amongst a few other securities took place, causing major financial consequences for certain hedge funds and large losses for short-sellers”.
What happened?
We spoke to Hans Sicat, Tatler 400 lister, country manager for ING Bank Philippines, board member of the Investment House Association of the Philippines and previous CEO of the Philippine Stock Exchange to get more insight on the case. Interestingly, it all started with a Reddit group called Wall Street Bets (WSB).
“The GameStop situation is a unique event in the market. As a quick background, GameStop is an old brick-and-mortar operation video game retailer. In this age of digitalisation, many people think this business model will become obsolete soon. However, some had the opposite view,” he explains. Sicat adds that “back in 2019, one of the major players in the Michael Lewis' book (and film) The Big Short, Michael Burry, purchased a stake in the firm because he thought it was undervalued. He actually pushed for changes to improve its operations and future. His moves probably put GameStop on the radar of many retail investors using the website [Reddit]".
“GameStop’s astonishing run can be traced to August 2020, when Ryan Cohen, the co-founder of the online pet supply company Chewy, disclosed that he held a major stake in the company,” shares the Washington Post. Then, things got interesting. Your average armchair retail traders, aka you and me, got wind of stockbrokers, professional traders, and your cliché finance ‘bro’s short-selling GameStop shares in order to earn big, and found an opportunity to, well, stick it to "the man".
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What is short selling?
Gen.T Honouree Mica Tan, co-founder and CEO of private equity firm MFT Group of Companies de-mystifies the concept. “Short selling may be compared to borrowing something and then pawning it with the hopes that money grows so you can buy back the pawned item at a profit. It's a bet against the company, where you make money when prices go down. It serves as a check-and-balance incentivising short-biased traders in finding out inefficiencies. Short selling is not a fun game if you don’t know what you’re doing. There are those who know what they’re doing, those who get lucky, those who get scared, and those who research and learn on how to capitalise on these moves… sometimes a little too late”.
Essentially, what happened was, an army of armchair traders begun purchasing small amounts of GameStop stock, then the seasoned players caught wind and knew they could make a killing and things really got heated. Demand spiked and the stock price skyrocketed.
Veloso explains, “What happened in the GameStop situation was that the large scale short-selling of the stock led to a “short squeeze” where not enough shares of GameStop were available to be bought in the market to close short-sold positions. The Reddit traders’ sentimental affinity for GameStop and AMC, and their loathe for hedge funds (which are perceived as the perpetrators of the last recession) drove the retail community to buy shares and drive prices up. When this happened, traders with short positions were “squeezed” until they closed their short positions and “return the stocks borrowed”.
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