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The GameStop Scandal Explained

Updated: Dec 13, 2023

By Joyce Azonye

On Jan. 27, GameStop’s stock experienced a rise of about 1,900 percent, according to Matt Benjamin, senior macroeconomic analyst at GameStop. Benjamin notes that the stock went from a price of $17.25 on Jan. 4, the first trading day of 2021, to $347.51 in late January. Investors nationwide developed curiosity about why this happened.

Graphic Credit to Wikimedia Commons

A stock rise happens when there is a high demand for a specific stock, so the price increases. If people wanted to sell stock, the price would drop.

According to The New York Times, GameStop is struggling even as the industry around it is booming. This is because of a fight between large financial institutions and small corporations to establish GameStop’s popularity in the markets.

Bigger institutions were trying to sell stock but failed to do so due to a process called short selling.

Short selling is when investors sell stock shares now because they think the stock’s value will go down, and they will be able to buy them at a better price later. However, if the shares sold go up in price instead, investors lose money and will return to the market to buy back the shares they owned.

The Reddit community discovered the short selling around Jan. 30. and began to monitor it.

The rivalry between institutions led GameStop's share price to skyrocket. The company experienced a decline in their quarterly revenue, specifically in their monthly results.

To combat this, GameStop attempted to adjust to the advancement of online gaming and electronic downloads. This advancement has increased more during the COVID-19 pandemic because more people are playing games online.

After this advancement, when the short sell of the stock occurred, hedge funds and small investors experienced substantial economic ramifications. Jesse Pound, a writer for CNBC, said that GameStop lost more than 70 percent of its stock value.

Short sells only work before institutions fill all their job positions. Then, the stock market drops back to a low level. For example, GameStop traded at $56 as of February 2021. In Jan. 2021, it peaked to almost $400.

Harvard Law School Professor Jesse Fried believes short selling benefits the market.

“My concern is that GameStop will harm retail investors by reducing short-selling in the market,” said Fried. “Short sellers are widely hated, but they actually protect unsophisticated market participants.”

Photo Credit to Forbes

After suspending the trading of GameStop stocks, an online brokerage called Robinhood is now facing several lawsuits regarding GameStop’s trading being shut down.

Robinhood claimed no blame, noting that it is the responsibility of others outside its influence to stop trade, like GameStop itself. Sophomore finance major and member of the Student Managed Investment Fund (SMIF), Andres Jaramillo, believes Robinhood is to blame.

“Hedge funds are supposed to be the sharpest and more knowledgeable groups working in the finance world and they got uprooted by a group of amateur investors,” said Jaramillo.

“This showcased the chinks in the hedge fund’s armor.”

Despite the struggles of the stock market, Jose Torres, a SMIF member and senior finance major at Barry, believes this scandal encouraged those who did not know about the stock market to learn more.

“Although it might have taken a crazy situation and a lot of fear of missing out to reach this point, I am glad to hear my friends and colleagues asking questions regarding stocks or financial markets,” said Torres.

Investors and industry watchers agree that online platforms have proven that they can be a force in the business.

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