Let’s rewind to 2020. Keith Gill, a 33-year-old investing enthusiast, was frequenting a Reddit forum dedicated to investing. During one discussion, someone said that GameStop’s stock, priced at $5 per share, was a great bargain.
Over the next year, Gill invested his life savings into this stock. By January 2021, the value of Gill’s initial $53,000 investment in GameStop had skyrocketed to nearly $50 million.
Was he a financial whiz? Nope. Gill wasn’t the only person who made tens of millions of dollars or lost more than that. Sony just released the trailer for a movie based on GameStop that shows how interconnected the world of technology, finance and social media is. You’re not going to believe this story.
David vs. Goliath showdown
In late 2020, folks hanging out in the Reddit group r/WallStreetBets were chatting about GameStop. They saw that the big hedge funds were betting on GameStop’s failure and thought, “Hey, what if we could change that?” So, they started to work together to buy lots of GameStop stock.
This would increase each share’s price and hopefully show those hedge funds they were wrong to bet against GameStop.
The hedge funds had been “shorting” GameStop’s stock, effectively gambling on its price to keep dropping. This involved borrowing and selling shares on the open market, intending to repurchase them later at a lower price and profit from the difference.
Retail investors take the stage
More investors were now following the stock and began buying GameStop shares and call options in droves, leading to a “short squeeze.” This sudden influx of buying activity drove up the stock’s price, putting the hedge funds in a very tight spot. Their bets were not working, to the tune of hundreds of millions of dollars.
At the peak of the frenzy, GameStop’s stock price skyrocketed from around $17 to a high of $483. That’s how Gill’s $53,000 investment grew to $50 million.
GameStop saw its market cap soar from $2 billion to over $30 billion in a matter of months. Remember, downloading games was the norm, not people visiting video game stores.
The bubble burst
You know when you’re playing a game of musical chairs and the music stops suddenly? That’s what happened with GameStop’s stock. It had risen like a rocket, but trading apps like Robinhood stopped the music by pausing the buying and selling of GameStop shares.
This made the stock’s price fall quickly. People who joined late, thinking they could still grab a chair, lost a lot of money. They bought the shares when the price was high, but then the price dropped sharply. So, they ended up with shares worth much less than what they paid.
“Dumb Money”
This fall, Sony will show how the GameStop saga “Dumb Money” played out in high-definition drama. Warning: Every other word in the movie’s trailer seems to be an f-bomb. That said, you can watch it here.