It’s the year of the meme stock, and retail investors have taken matters into their own hands. At the heart of the trading frenzy that swept Wall Street is the struggling video game retailer GameStop (NYSE:GME).
GameStop as a company hadn’t performed well in the years leading up to the short squeeze. Increasingly, video game buyers converted to digitally streamed content rather than buying physical games in a brick-and-mortar store.
GME closed out 2020 with a share price of $18.84. Nine months prior to that, it was listed in penny-stock territory, at just $3.25 on April 1, 2020.
To most analysts’ surprise, GME surged in January, temporarily reaching a high of $483 and effectively demonstrating how powerful social media and meme stocks can be.
TL;DR
- GameStop (GME) launched in 1984 in educational software, then switched to video game retail in 2000 before going public in 2002.
- GME became the “meme stock” that led the charge early in 2021 as users of the Reddit community WallStreetBets pumped up the stock’s price.
- Many hedge funds were attempting to short GME and other meme stocks like AMC.
- Social media users often pump up meme stocks as a way to force hedge funds to sell shares of stocks they had previously shorted (aka a short squeeze).
- GME continues to intrigue investors and analysts, as shares are still trading much higher than they were in 2020 and the beginning of 2021.
What caused this stock volatility, and why GME?
The r/WallStreetBets community likely targeted GameStop because share prices were extremely low, well under $5 each. At the same time, traders watched the markets for companies with high short interest.
Why was GameStop trading so low that it caught the eye of the meme stock crowd? In large part, GME’s poor performance was simply because brick-and-mortar stores are increasingly being phased out. This is especially the case for the video game industry, as instant digital streaming has earned its place in society (a pivot that has only been heightened since the COVID-19 pandemic shutdowns).
The Verge reported in January that the GME craze could also be partly attributed to boredom during the pandemic, drawing more people into day trading. Plus, online brokerages and trading apps made day investing (and even options trading) highly accessible.
People in the WallStreetBets community hyped up GME, posting about buying the stock and how it would punish the short sellers. One influencer, Keith Gill (or RoaringKitty on YouTube) was at the crux of the matter. The more everyday investors bought up GME, the more short-selling hedge funds were forced to exit their positions, driving up the price more (and leaving hedge funds with significant losses).
Why and when GME trading was halted
GameStop stock prices became so volatile that multiple times, certain brokerages prevented investors from trading shares of GME. The NYSE, Robinhood, and more imposed restrictions, causing an outcry from retail investors.
January 22: GME triggered a circuit breaker halt. Circuit breakers are regulatory measures that temporarily halt trades on an individual stock or broad index. They’re used to help curb panic sales or pause buying craze.
January 25: GME trading was halted nine times.
January 28: The brokerage app Robinhood shut down users’ ability to buy GME and limited them to selling. The company posted that they were restricting transactions “in light of recent volatility.” Interactive Brokers also stopped GME trades, and TDAmeritrade imposed some restrictions as well.
March 10: Halts on GME happened again as share prices rose by 40% before dropping again.
What to expect in the future of GME
Alexis Ohanian, the co-founder of Reddit, told CNBC in January that what happened with GME and WallStreetBets would likely impact the stock market in the future.
“I don’t think we go back to a world before this because these communities, they’re a byproduct of the connected internet.” – Alexis Ohanian
What will happen to GME stock is largely unpredictable, which is what gives this flagship meme stock a higher level of attributed risk. GME has remained well over $100 a share and often much higher since the initial January volatility. For instance, on May 28, four months after some of GameStop’s peak prices, the stock opened at $262.97 and closed at $222.
The first week in June, Jefferies Prime Brokerage announced it will cease to allow short selling on GME and other meme stocks (like AMC and MVIS).
Bottom line
Perhaps a major lesson GME has taught investors is that nearly anything is possible in the stock market—even the revival of a stock thought to be on its last legs. If Ohanian is correct about the future impact that online communities will have on the stock market, GME and other meme stocks will be a part of the equation that cannot be ignored.