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Why Reddit made GameStop and BlackBerry stock suddenly jump

Why Reddit made GameStop and BlackBerry stock suddenly jump


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GameStop and BlackBerry stock have soared in recent days.


Sarah Tew/CNET

GameStop isn’t just a store that sells video games. It’s also one of the biggest bets Wall Street traders have made lately, with nearly all of them expecting it to fail. That was until Monday morning, when a bunch of Reddit users decided to play the market and push GameStop’s stock up to nearly three times its average over the past several months.

It all started last week, when posters on the Reddit stock trading chat community WallStreetBets attempted to push up shares in the struggling game retailer. With much of Wall Street betting against GameStop’s success, WallStreetBets investors believed they could force a market rally by creating demand where there had been little before.

The result: GameStop stock jumped from $17.25 at the beginning of the year to a high of $159.18 Monday. That’s an increase of more than 822%.

The Reddit community has also turned its eyes on BlackBerry, attempting to pull the same trick with the once popular smartphone maker. So far, they’ve pushed shares up more than double from $6.58, where they started at the beginning of the year.

Here’s what to understand about GameStop and BlackBerry.

How’d this happen?

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GameStop is one of the largest video game retailers in the world, but it’s struggled to remain relevant in the age of online sales.

Effectively the WallStreetBets crowd created artificial demand for GameStop and BlackBerry shares with their own money. There are 2.2 million members of the WallStreetBets community, though it’s nearly impossible to understand how many people are involved in the GameStop and BlackBerry schemes.

What happens is that by buying a lot of GameStop shares quickly, the price rises. That’s normal. With GameStop, though, there are also a lot of short sellers, or people who effectively bet the stock will drop rather than rise.

But there’s a hitch. If GameStop’s price rises too much too quickly, short sellers — the people betting on GameStop’s struggles — are forced to buy even more stock to cover their losses. That pushes the stock up even more.

That’s how we suddenly see GameStop’s value jump.

What’s a short seller?

When people buy a stock normally, they’re betting it’ll rise or share enough profits that they’ll make more money than they put in.

Short sellers, or “shorts,” do the opposite. Shorts strike a deal with buyers, promising to sell them the stock at a fixed price in the future.

So, imagine Ian Corp. is a public company, and its shares are worth $10. A “short” would offer to sell Ian Corp. stock for $8 in a month. Their bet is that Ian Corp. stock will actually drop below that — maybe to $4. If it does, then in a month when the contract is executed, they sell the stock for $8 and pocket the other $4.

If Ian Corp. stock jumps to $25, then the short has to pay the extra $17 in order to fulfill the contract, selling the stock for $8.

When a short is right, betting against a company, they can make a lot of money. But if they’re wrong, they can lose a lot more money too.

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GameStop Stock from January 19 to January 25.


Google Finance

How much money did the GameStop shorts lose?

The losses appear to be tremendous. Shorts appear to have lost $3.3 billion betting against GameStop so far this year, according to MarketsInsider. Of those losses, $1.6 billion, or about half, happened on Friday, Jan. 22, when the stock jumped 51%.

It’s also worth noting that GameStop began the year as one of the most shorted companies on the market.

That seems like a lot of money

It is, but what’s perhaps an even bigger indication of how dramatic these moves were, GameStop share sales were halted during Monday trading because they were moving too fast.

These wild swings won’t continue forever, will they?

Part of what’s driven this behavior is the popularity of retail investing, or when traders who aren’t Wall Street professionals buy and sell stocks. Stock trading apps, often with no fees, have made it easy for people to jump into the market. And social media has helped people to rally together, egging one another on to buy more and more of a stock.

“GameStop’s rally is one in a series of eye-catching market moves to stir concerns among fund managers, some of whom say trading by individual investors is pushing stock prices out of whack with fundamentals,” the Wall Street Journal wrote Monday.

What do the companies think of all this?

GameStop didn’t respond to a request for comment. BlackBerry executives told MarketWatch it was “not aware” of any reason for the recent trading activity. BlackBerry did reach a settlement with Facebook earlier this month over a patent fight, though the terms were not disclosed.

Should I try to get in on the frenzy?

It’s always smart to consult a financial professional before making investing decisions.

See also: How to choose a credit card



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