Jake Fitzgerald Helps Us Understand The GameStop Stock Situation

The more you dig into this story, the more interesting it gets. 

NOTE: I have nothing close to any experience in finance. I'm learning new terms by the minute. This is why we had Jake on to explain things to us. This is NOT financial advice in any way. It IS a fascinating story.)

Here's what the price of a share of GameStop looks like charted over the past year.

Notice the exponential growth that happens right at the end of the graph. That all started just two weeks ago. The stock price had been hovering around the 3-5 dollar range since June of 2019. It started to creep up slightly in September of last year and would eventually end up at about 18 dollars at the close of the year.

The reason for this rise was thought to be because of a $76 million dollar investment from a man named Ryan Cohen. Cohen was the founder of Chewy.com that was eventually sold to PetSmart for $3.5 billion.

Real quick, let's talk about the concept of GameStop. We all remember going to GameStop 10 years ago to trade in your equipment or old games for pennies on the dollar. The problem with the current model is that the internet has allowed people to sell their own equipment for a much better profit and the demand for physical video games has plummeted. Millions of gamers have stopped owning physical copies of their games and are downloading them instead.

The internet was doing to GameStop what it did to Blockbuster a decade ago. Made them obsolete. In hindsight, Blockbuster could have survived had they embraced the internet instead of trying to make the square peg of their business model fit into the round hole of society.

That is what Cohen's intent was rumored to be when he made the investment. He was going to move GameStop into the internet era and not let them get "Netflix'ed" like Blockbuster did.

This is supposedly why the stock saw a slight rise in September.

Some on Wall Street disagreed.

Here's where I started learning things 3 days ago, and what Jake Fitzgerald from Ameriprise Financial cleared up for us today. I'll try to explain:

Some of those on Wall Street that didn't think GameStop would survive were part of some big hedge funds. Basically, financial behemoths that have a lot of influence on the market.

One term you have to know to understand this is Short Selling. This, from what I gather, is essentially gambling. You can "bet" on the fact that a stock will go down in price. If it does, you earn however much it goes down. Short sell it at $10 and cash out when it hits $1 and you've made $9 dollars a share.

Why this is a thing is something I really haven't figured out yet. It has something to do with borrowing against your trade, but I don't quite get it yet.

The EXTREMELY risky part of short selling is if the stock goes up, then you are on the hook for the difference in price.

So. The hedgefund groups started shorting TONS of GameStop stock when it started to rise, thinking the plan would fail and they would reap a financial windfall when it eventually bankrupted.

This annoyed a group on Reddit called /r/wallstreetbets. It's unclear, to me at least, if this was started because they saw a financial opportunity or they didn't like someone betting against an idea they hoped would work, (probably a little bit of both) but they put together a plan to attack these hedge funds.

They bought GameStop stock en masse and started talking about it online. This made the stock rise even higher, meaning those short stocks were now a burden of debt for those that held them.

Another thing about short selling is that once you start owing money, your debt can be collected whenever those that control it want. So once debts were starting to be paid off, even more stock of GameStop was being bought, which made the price jump even higher.

These things just kept happening over and over until it hit over $350 this morning. If some of these calls are asked to be paid today, it could destroy some of these hedge funds.

It's a wild story that's now starting to happen with AMC as well as Bed, Bath, and Beyond.

Jake from Ameriprise Financial does a great job explaining it to us so make sure to give it a listen. He joins us every day at 8:50 for a stock market report and answers any ridiculous question I might have for him that day.