Yesterday investment specialists watched as US video game retailer GameStop saw its share price soar to around $380 per share in defiance of all expectations.
The huge surge in the company’s share price has caused massive losses on Wall Street and led to the White House admitting it is “monitoring” the situation.
At the start of January GameStock's shares were trading on the New York Stock Exchange for around $40 a share. Investors were expecting this to fall after an analyst's report claimed the shares were already overvalued and should be trading at around $20 a piece.
Instead GameStop's shares began to steadily climb in value and yesterday (January 27) the share price soared to around $380.
From the outside the situation looks bizarre and confusing especially considering that GameStop's business model is that of a traditional retailer.
The company sells video games from its brick and mortar stores around the US, meaning it is operating in a retail space that is not well suited to the coronavirus pandemic.
So why has GameStop’s share price increased so dramatically? And why is that a huge problem for the US financial markets?
What caused GameStop's share price to rise?
GameStop's unexpected share price increase was largely caused by private investors that grouped together to buy the company's shares.
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This small army of investors organised themselves, mostly through chat rooms such as Reddit, in the hopes of profiting from bets made by private investment companies on Wall Street.
A number of these Wall Street firms have placed significant financial bets that GameStop's share price will fall - a practice known as short selling.
But by organising a large number of people to buy GameStop shares, the smaller traders have caused GameStop's shares to increase in value, costing Wall Street a fortune.
What is short selling and how does it work?
Short selling, or shorting, is financial practice where investors effectively bet that a company's share price will go down.
The practice works by investors agreeing to borrow shares for a set period of time and then making a number of trades with the aim of making a profit when the share price falls. The practice was a major plot point in the film The Big Short, which told the story of those who made money during the collapse of the housing market.
In effect, the investor buys the shares at a set price and agrees to sell them back to the original owner at the initial price. During this time the investor then sells the shares to others. When the share price falls the investor buys these shares back again and returns them to the original owner - pocketing the difference between the old and new price.
For example:
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Mr Smith (short seller) agrees to buy a share in Apple at £10 a share from Mr Brady.
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Mr Smith then sells his share for £10 to another investor.
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Apple's share price falls to £8, and Mr Smith buys back his share at the new price.
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Mr Smith then sells the share price back to Mr Brady for £10, as they previously agreed.
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Mr Smith has made £2 profit from the deals.
Why has GameStop's share price been bad for Wall Street?
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After hearing analysts' claims that GameStop's share price was overvalued a number of Wall Street investors began short selling the company's shares.
If the share price had fallen these firms would have made a lot of money but because the price increased they now stand to make a huge loss.
With the share price increasing to almost $380 Wall Street investors are having to buy back their shares at a price nearly 10 times what they agreed to sell them for.
Melvin Capital Management is one of the firms that decided to short GameStop. However, the firm told CNBC that it had now closed out its short position after taking a huge loss.
The hedge fund has lost 30% of the $12.5bn (£9.1bn) it manages this year.
Why are Reddit users doing this?
The investors that banded together on Reddit have helped raise GameStop's share price for a couple of reasons.
The first is simply to make money. By inflating the share price these investors have caused what is known as a "short squeeze", making the Wall Street firms that shorted GameStop lose their financial bets, while allowing them to profit.
The other reason is more anarchistic. Many investors and private individuals are against short sellers because they root for companies to fail. Other people on the Reddit chat simply do not like those working on Wall Street.
How do you feel about investors inflating GameStop's share price? What do you think about the losses facing Wall Street? Let us know in the comments below.