You’ve likely heard about the Gamestop Corp (NYSE: GME) saga. I didn’t want to write a post on it but I realised that there is one glaring misconception among Reddit investors that should be addressed.
Many users within the Wallstreet Bets group in Reddit have mentioned that they want to save Gamestop from short sellers.
It’s as if they believe that pumping up the share price of Gamestop will somehow save or help the company.
I appreciate the noble thought, but the concept that driving a company’s share price higher will help it is not how stocks work.
What’s really going on
The stock price is simply the last traded price of the company’s stock. It is the amount that the latest buyer paid to purchase the stock from the previous stock owner.
Buying and selling shares on the stock exchange does not in any way impact the underlying business fundamentals of the company. The money you are paying to buy Gamestop’s stock actually goes to the person who sold you the stock, and not to Gamestop, the company.
Likewise, there is a misconception that short sellers are destroying a company by trying to drive a company’s stock price down.
This is not the case. Even if a company’s stock price declines, the fundamentals of the company will not change. A fundamentally solid company with a low stock price may, in some cases, even be a good thing for its long-term shareholders: The company can take advantage of the low stock price by buying back its shares to reduce the outstanding share count.
A great example is Restoration Hardware Holdings (NYSE: RH), which was targetted by short-sellers in 2017 and 2018. Seizing the opportunity presented by a low stock price, Restoration Hardware’s management team used the company’s cash to buy back its shares, resulting in a 59.8% decline in its outstanding share count. This created massive fundamental long-term value for its remaining shareholders. Its stock is now up 1,600% since the start of 2017.
How to really save Gamestop?
If you really want to help Gamestop, you can purchase merchandise directly from Gamestop’s retail stores. This hands money over to Gamestop directly.
Similarly, if Gamestop offers a secondary offering or issues a bond, investors who buy into these offerings will be handing money directly to the company.
These are the real ways that you can help Gamestop’s business.
The unpopular truth is that just buying Gamestop’s stock on the stock market is not really helping Gamestop at all.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned.
Hi, I do feel that you are the one that is having misconception about WSB objective.
Most people in this WSB saga knows that they are not saving GameStop, but in fact to make a statement against short sellers. From so many posts on social platforms, I have not seen pple promoting the idea of saving GameStop. Have you been misinformed?
Hi,
Thanks for dropping by. Yes, I know that most people in the Reddit group Wall Street Bets are making a statement against short sellers. But there are some who seem to think that driving the stock price is also in some way helping the company and that short-sellers trying to push the price down is bad for the company. That’s a misconception.
i agree with Jeremy. I have seen viral posts on facebook eg this guy Sam V. Martin
“…A hedge fund tried to force down the price of Gamestop, and short the stock. It usually works fine. It’s been done thousands of times, with no problems. So they shorted Gamestop (GME) from $20, to $10, to $4. Their greed kept compounding. They kept doing it again, and again, for months. Making billions of dollars, and almost bankrupting this company….”
Even an local article that states that GME shorters have every incentive to bankrupt the company (which is technically true but is somewhat misleading)
I believe the biggest unpopular truth is that redditors aren’t really making statements about wall street fat cats or hedge funds. That’s just the PR or marketing pitch. They’re really in it to make fast bucks. Lol.