GameStop was forced to miss out on a big opportunity during the unprecedented rise of it’s stock prices last month.
In late January, several day traders on Reddit, specifically the r/WallStreetBets subreddit, noticed that several large hedge funds were shorting GameStop stock. What this means essentially, is that the hedge fund managers had borrowed the stocks and sold them, assuming that they would fall in price, so that when they bought the stocks back to return them, they would make a tidy profit.
Of course, if the price of GameStop stocks rose for some reason, the hedge funds would be forced to buy back the stocks at a loss. Potentially infinite loss, depending only on how much they rise. So, in order to mess with the large hedge funds, Redditors began buying GameStop stock en masse, causing GameStop’s price to spike dramatically. Despite starting at less than $5 a share, the price of a GameStop stock hit over $300 at one point. Of course, new restrictions on trading caused the price to plummet just as quickly, but not before inflicting massive losses on the hedge fund managers.
Despite its own stock prices raising by absurd amounts, GameStop wasn’t able to legally capitalize on the opportunity. The company believed that, under US financial regulations, it would not be allowed to sell shares because it had not updated investors on its earnings. Doing so would expose it to a regulatory risk it was not willing to take. Because of this, it wasn’t able to make any money off their stocks’ massive upswing in price.
Of course, all this general chaos around GameStop’s stock price has not gone unnoticed by financial regulators. The Justice Department is looking into what happened on WallStreetBets, as have several other regulatory agencies. Because manipulating stock prices is illegal, and the government is going to want to investigate whether or not what the traders of WallStreetBets did constitutes illegal activity.
With the rise of competitors like Amazon, consumers moving to digital downloads, and the pandemic keeping people inside, it’s no secret that the company has been struggling in recent years, and GameStop is likely to go out of business in the near future. While it might not have saved it in the long run, being able to take advantage of this opportunity would have given the company a much-needed cash infusion, which might have helped it with its $216 million of debt.
There are good reasons that companies can’t do this though. If companies could sell their stocks without disclosing their own financial information, they could use that information to screw over investors. Companies facing financial ruin could, for example, sell off most of their stock while its price was high only to then disclose their financial troubles, causing their stock to plummet and hurt investors.
Source: Reuters
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