How Did Companies Lose Money To The GameStop Stock Surge?

Two weeks ago a "phenomenon" as Wall Street commentators called it had occurred in the stock market. GameStop a company on the decline had seen an exponential growth in its stock market. This hit hedge funds and short-sellers the hardest it seemed like Redditers had achieved their goal, but the trend has lost traction and so has the stocks.

How did the rise in GameStop's stock happen?

What was the point behind Reddit influencing the media to buy shares in Gamestop?

In order to get the full understanding, we have to go back to the beginning. Towards the end of January, there was a small group of users on Reddit who decided to buy up shares in the declining video game franchise GameStop. The reasons behind this were that some Reddit users still envisioned Gamestop's future, while the majority of Reddit users saw it as a chance to make stockbrokers and hedge funds lose money. 

With the influence of Reddit and social media, Gamestop had seen more than a 400% increase in their share price with each share being valued at $347.51 apiece. This price jump was a huge increase from the $6 shares they were valued at a couple of months ago. This put many investors in a really bad situation as Reddit users watched them scramble to save themselves.

How did companies lose money to GameStop?

Here are ways companies lost money to the Gamestop stock surge.

This question has a simple answer... short selling. How it works, short-sellers borrow shares from a company that they see failing in the future.

The shares are worth a certain price and the shorters sell it at that price, their bet is that the value of the share would decrease; if it does they buy the share back at the decreased value price and they've essentially made a profit.

Use this example for a better understanding, you borrow a game from someone, you agree to give the game back in two months and you sell it for $40. Your bet is that the game will lose its value within those two months. When it does you buy the game back for $20 and the profit you made from the short sell was $20.

But, if the price of the game were to increase you would potentially lose money because you would have to buy the game back at a higher price than what you sold it for. That is exactly what Reddit did to hedge funds and short-sellers.

How did this effect the stock market?

Hedge fund companies and short sellers were affected the most.

A hedge fund, Melvin Capital Management closed on its shorts position in Gamestop amid their huge losses. Reportedly Melvin Capital had seen a 53% percent loss to GameStop and other companies that they had bet against. 

Melvin Capital assets currently sit at more than $8 billion a big drop from the $12.5 billion that they started with at the beginning of the year. Citadel lost 3% of its fund in January including the 1% the company investment had invested into Melvin Capital.

Point72 Hedge fund had decreased 10% in January as well. The total shorts lost in January were $5 billion according to Investopedia. Robinhood and other trading platforms restricted users from selling and trading shares which led to backlash and lawsuits. 

Lawmakers and investors who were affected are voicing their opinions saying there should be regulations put in place to prevent this from happening again. Many saying it is dangerous manipulating the stock market and should be illegal.

GameStop stock is dropping they are now beginning to lose the war

Gamestop won the battle but, is starting to lose the war and here's how.

GameStop had a tremendous run but, it is coming to an end just like every trend. Eventually, people were going to realize that investing in a company that is bound to fail isn't the best idea.

Once Reddit started to use its influence to buy shares in other failing companies like AMC, BlackBerry, and Nokia it was only a matter of time for people to move on and forget about GameStop.

A short seller named Andrew Left who was affected by GameStop's share jump announced that he had covered his losses and stated that "GameStop will fall back to $20 a share fast". Andrew was right.

For the past week, GameStop's shares have dropped dramatically yet there are still a lot of people with hope who are holding onto their shares, but in reality, they are seeing their share value decrease fast every day. At the start of today, GameStop shares were valued at $59.68 and a few hours later they are now worth $49.99.

Seeing this company rise from $6 a share to $347.51, then drop down to $49.99 shows you what can happen when a company gains and loses traction. Reddit users may have had the first laugh, but it is now looking like Reddit has realized they have done all they could.

Redditer's one last laugh at the stock market

Redditers knew that this trend was coming to an end so they decided to have the last laugh.

While there are a lot of businesses and investors recovering from this storm Reddit decided to rub it in their face one last time. This past weekend was the anticipated Superbowl game and everyone was tuned in to see Tom Brady win his 7th championship.

Reddit decided to buy a five-second advertisement for a commercial break about GameStop. The advertisement stated, "one thing that they learned about their community is that underdogs can accomplish anything when they come together and have a common interest". This was a brilliant marketing idea, the message reached a broad audience and had positive reviews. 

Since the ad was only five seconds long they wrote the ad as a message which made people pause the screen to read the ad. This captivated their audience and aggravated the people who were affected by the "phenomenon". Reddit had the first laugh and knew that the joke wouldn't last forever so they decided to have the last laugh as well.

Even though GameStop may be falling back to the position they were in, They should be proud to be a part of something big. GameStop may have started a new revolution and one thing is for certain... You should never count out the underdogs.