Why are GameStop shares on the rise again?

CBS News
13 May 202405:11

TLDRGameStop shares surged by 74% on Monday, fueled by the influence of a Reddit user known as Roaring Kitty. In June 2020, Roaring Kitty claimed GameStop was undervalued, which gained significant traction on Reddit's WallStreetBets forum. Despite major losses reported at the end of 2020, attributed partially to the pandemic, the chaotic buying frenzy that ensued led to a 1000% jump in GameStop's stock price. Analysts and traditional traders were caught off guard, resulting in billions lost. Trading in GameStop shares had slowed down until Roaring Kitty posted a cryptic image on Sunday, which some interpreted as a buying signal, adding approximately $4 billion to the company's market cap. The SEC adopted new rules in 2023 to protect the market from similar stock trading trends, but the effectiveness of these measures remains to be seen. The situation highlights the risks retail investors face in a market influenced by social media and momentum trading, rather than company fundamentals, which for GameStop have been weakening with sales 24% lower than the previous year.

Takeaways

  • 📈 GameStop shares closed up 74% on Monday due to a post by Roaring Kitty, who previously claimed the stock was undervalued.
  • 🚀 Roaring Kitty's position gained traction on Reddit, particularly in the WallStreetBets thread, leading to a chaotic buying frenzy.
  • 📉 Despite major losses reported at the end of 2020, partly due to the pandemic, traditional traders would have sold, but Roaring Kitty saw a bargain.
  • 🎮 GameStop shares once jumped by 1000%, causing analysts to lose billions on their predictions about the company's decline.
  • 📉 GameStop trading has since slowed down, and Roaring Kitty was not posting actively until a recent post suggesting a focused position.
  • 🧐 Some investors interpreted the recent post as a buying signal for GameStop, similar to the return of Willy Wonka to the factory.
  • 📊 The post added about $4 billion to GameStop's market cap by the end of the day it was made.
  • ⚖️ The Securities and Exchange Commission (SEC) adopted new rules in 2023 to protect the market from the 'meme stock' trading trend.
  • 🤔 There is some conflicting regulation regarding the opinion and influence that can be legally exerted on stock prices.
  • 🚨 The SEC's actions might affect future trading, but the lack of specific reference to GameStop in the post could provide some legal leeway.
  • ⛔ Retail investors are at risk with such market movements, especially with the market at an all-time high.
  • 🚨 Roaring Kitty does not have special insider information; his influence relies on investors following his lead.
  • 📊 GameStop's fundamentals are weak, with sales 24% lower than the previous year, and the video game market is not performing well.

Q & A

  • Why did GameStop shares close up 74% on Monday?

    -GameStop shares closed up 74% due to the influence of a Reddit user named Roaring Kitty, who had previously posted that he believed GameStop was undervalued. His position gained traction from the Reddit community, particularly in the thread WallStreetBets, leading to a chaotic buying frenzy.

  • What happened in June 2020 that contributed to the rise in GameStop's stock?

    -In June 2020, Roaring Kitty posted on Reddit that he thought GameStop was undervalued. This post gained significant attention and support from the Reddit community, particularly users in the WallStreetBets thread, which contributed to the initial rise in the stock.

  • What was the situation with GameStop's financial performance at the end of 2020?

    -GameStop reported major losses at the end of 2020, which were partially attributed to the impact of the pandemic. This led traditional traders to sell, while discussions about Roaring Kitty's position picked up, signaling a potential bargain to some investors.

  • How did the stock market react to the situation with GameStop in early 2021?

    -The stock market reacted with a surge in GameStop shares, which jumped by 1000%. This led to analysts predicting the financial decline of GameStop and resulted in significant losses for some, amounting to billions.

  • What was the status of GameStop trading after the initial frenzy?

    -After the initial frenzy, trading for GameStop largely slowed down. Roaring Kitty was not posting or influencing the stock anymore until he made a new post on Sunday, which reignited interest.

  • What was the significance of the image posted by Roaring Kitty on Sunday?

    -The image posted by Roaring Kitty on Sunday depicted a man sitting in a chair, which is meant to express determination or focus. This image is significant within the gaming community and was interpreted by some as a buying signal for GameStop.

  • What did the Securities and Exchange Commission (SEC) do in response to the stock trading trends in 2023?

    -The SEC voted in 2023 to adopt new rules aimed at protecting the market from the 'meme stock' trading trend, which had been influenced by social media and retail investors.

  • What is the potential impact of the SEC's new rules on the current trading situation?

    -The SEC's new rules might affect the current trading situation by providing a regulatory framework to prevent similar 'pump and dump' activities. However, there is some conflicting regulation and it's unclear how effective these rules have been or will be in preventing such market manipulation.

  • How does the situation with Roaring Kitty differ from insider trading?

    -Insider trading involves having and using non-public, material information about a company for personal financial gain, which is illegal. In contrast, Roaring Kitty does not have special or insider information; his influence is based on the community's trust and the momentum he creates.

  • What is the current state of the video game market and GameStop's performance?

    -The video game market is currently in a downturn, and GameStop's fundamentals are weak, with sales being 24% lower than the previous year. Despite the recent momentum in the stock price, the company's long-term financial outlook remains uncertain.

  • What are the risks for retail investors in following social media influencers for stock picks?

    -Retail investors who follow social media influencers for stock picks are at risk due to the potential for market manipulation and the lack of solid financial analysis. The momentum-driven stock movements can lead to significant losses if the fundamentals of the company do not support the stock's value.

  • What steps should retail investors take to make informed decisions in the stock market?

    -Retail investors should conduct thorough research, consider the financial health and performance of the company, and not rely solely on social media influencers or community-driven trends. Diversifying investments and seeking advice from financial advisors can also help mitigate risks.

Outlines

00:00

📈 Roaring Kitty's Impact on GameStop Stock

The first paragraph discusses the influence of a Reddit user named Roaring Kitty on GameStop's stock performance. In June 2020, Roaring Kitty posted on Reddit that GameStop was undervalued, which led to a significant buying frenzy. This resulted in GameStop's shares increasing by 1000%. The post gained traction from the Reddit community, particularly the WallStreetBets thread. Despite major losses reported by GameStop at the end of 2020, attributed partially to the pandemic, the stock's trading volume surged. The Securities and Exchange Commission (SEC) adopted new rules in 2023 to protect the market from similar trends, but the effectiveness of these measures is questioned. The paragraph also touches on the legality of such activities, distinguishing them from insider trading, and notes the weak fundamentals of GameStop's business with declining sales.

Mindmap

Keywords

💡Roaring Kitty

Roaring Kitty is a pseudonym used by an influential Reddit user who believed GameStop was undervalued and shared his views on the Reddit thread Wall Street Bets. This individual's actions and the support from other users contributed to a massive increase in GameStop's stock price. His influence is pivotal in illustrating how social media and individual investors can impact financial markets, significantly diverging from traditional market predictions.

💡GameStop

GameStop is a retail company specializing in video games and gaming merchandise. It became the center of a significant financial event when its stock prices surged due to a coordinated effort by individual investors on platforms like Reddit. This scenario is a prime example of 'meme stock' trading, where the value of the stock is influenced heavily by social media and individual investor sentiment rather than traditional financial fundamentals.

💡meme stock

A meme stock refers to shares of a company that have gained a cult-like following online and experience volatility due to speculative trading. GameStop is a quintessential example, where the stock's value was significantly influenced by social media and individual investors rather than its economic fundamentals, leading to rapid price increases and subsequent declines.

💡Wall Street Bets

Wall Street Bets is a popular subreddit on Reddit where participants discuss stock and option trading. It gained widespread attention for its role in the GameStop trading frenzy, showcasing the power of collective retail trading and its ability to influence the stock market dramatically.

💡SEC

The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for regulating the securities markets and protecting investors. In response to events like the GameStop trading frenzy, the SEC voted to adopt new rules aimed at safeguarding the market from similar 'meme stock' trading trends, illustrating its ongoing role in adjusting regulatory frameworks in response to market developments.

💡market cap

Market capitalization (market cap) refers to the total dollar market value of a company's outstanding shares of stock. The script mentions that GameStop's market cap increased by about $4 billion in a day, highlighting the dramatic impact that social media and investor sentiment can have on a company's valuation.

💡options market

The options market allows traders to buy and sell options, which are financial instruments based on the value of underlying securities like stocks. The frenzy around GameStop involved significant activity in the options market, where traders speculated on the future price of the stock, contributing to its volatility.

💡pump and dump

Pump and dump is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. While traditional pump and dump schemes are illegal, the script discusses the nuances in the context of meme stocks where collective hype rather than deliberate misinformation might drive the stock price.

💡trading frenzy

A trading frenzy refers to a situation where there is a sudden and intense buying or selling of stocks, often driven by emotional reactions rather than financial logic. GameStop's stock experienced a trading frenzy as many retail investors rushed to buy shares, influenced by social media and speculative trading.

💡insider trading

Insider trading involves trading a public company's stock or other securities by individuals with access to non-public, material information about the company. In the GameStop scenario, it is clarified that Roaring Kitty did not engage in insider trading, as he was merely expressing his personal opinions without access to confidential company information.

Highlights

GameStop shares closed up 74% on Monday, driven by a post from Reddit user Roaring Kitty.

Roaring Kitty posted in June 2020 that he thought GameStop was undervalued, which gained traction on Reddit.

GameStop reported major losses at the end of 2020, partially blamed on the pandemic.

Roaring Kitty's post sparked a chaotic buying frenzy, causing GameStop shares to jump by 1000%.

Analysts who predicted the decline of GameStop lost billions as a result of the buying frenzy.

GameStop trading has largely slowed down since the initial frenzy.

Roaring Kitty posted a significant image on Sunday, which some interpreted as a buying signal for GameStop.

The post added about $4 billion to GameStop's market cap by the end of the day.

The SEC adopted new rules in 2023 to protect the market from the 'meme stock' trading trend.

There is conflicting regulation regarding the opinion and influence that social media posts like Roaring Kitty's can have on stocks.

Traditional 'pump and dump' activities have been proven legal in some cases.

The lack of a specific reference to GameStop in the new SEC rules might create some wiggle room.

The SEC will likely move quickly if this type of trading continues.

The new rules aim to protect retail investors, who are at risk with the current market volatility.

Insider trading, where someone has non-public information about a company, is illegal.

There is no suggestion that Roaring Kitty has special, non-public information about GameStop.

Roaring Kitty is reliant on investors following his lead, similar to a momentum-driven stock.

The fundamentals of GameStop as a company are extremely weak, with sales down 24% from last year.

The overall video game market is currently in a downturn.

Investors may still find value in GameStop beyond the short-term momentum driven by social media.

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