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Controversy Over GameStop’s Stock Market Saga Explained

FILE - Pedestrians pass a GameStop store on 14th Street at Union Square, Jan. 28, 2021, in the Manhattan borough of New York.
FILE - Pedestrians pass a GameStop store on 14th Street at Union Square, Jan. 28, 2021, in the Manhattan borough of New York.

In recent days, American financial markets have been gripped by the saga of a video game retailer’s soaring stock price.

GameStop, which makes most of its money selling video games in stores across America, saw its stock price rise as much as 1,700% this week, backed by fans who believe it is unfairly undervalued by large investors who had bet billions that its stock would fall. As small investors championed their purchases of the retailer’s stock in viral posts online, the stock rapidly rose in price, forcing the large investors to spend billions of dollars to cover their losses.

The drama around GameStop’s trading has drawn scrutiny from members of Congress, some of whom are calling for an investigation into the investors, companies and regulators involved.

What happened to GameStop?

GameStop is a retailer facing the same pressures as many others in the United States, where shopping trends and the pandemic have led more people to buy goods online instead of in stores. Wall Street investors started betting heavily against the company months ago, believing that its brick-and-mortar business model is doomed.

Not everyone agreed. Months ago, some members of a popular stock market discussion group on the Reddit website started encouraging others to invest in the company, saying that the big investors had gotten it wrong and that GameStop was significantly undervalued.

Eventually, more investors bought in, and this week, as the conflict went viral on social media, additional investors bought into the company fueling its rapid rise in market value. The rising stock price was disastrous for the large investors that had bet against it.

What is short selling?

Short selling is a complicated, high-risk trading strategy.

In short selling, an investor borrows stock from a lender and then sells it to a buyer at market value on the speculation the stock will decline in price. They then buy it back at the lower price, pocketing the difference before returning the stock to the lender. If that occurs, they make money.

What is Congress saying?

After the market tumult earlier this week caused by volatile trading around GameStop, AMC and other stocks, Democratic Senator Sherrod Brown of Ohio, incoming chair of the Senate Banking Committee, said Thursday that he planned to hold a hearing on "the current state of the stock market."

“People on Wall Street only care about the rules when they’re the ones getting hurt. American workers have known for years the Wall Street system is broken — they’ve been paying the price," Brown said in a statement. "It’s time for the SEC [Securities and Exchange Commission, which regulates U.S. stock markets] and Congress to make the economy work for everyone, not just Wall Street."

In the U.S. House of Representatives, Democratic Representative Maxine Waters, chairwoman of the House Financial Services Committee, said Thursday that she planned to convene a hearing to examine short selling and other stock market practices that have been highlighted by the trading of GameStop and other stocks.

"As a first step in reining in these abusive practices, I will convene a hearing to examine the recent activity around GameStop (GME) stock and over impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors,” Waters said in a statement.

Several members of Congress also sought probes into the investment app Robinhood, which for a period severely limited trading after the initial volatile GameStop trading earlier this week.