Hello, everyone, and welcome to the MBIT podcast. I'm your host, Shamus Madan. And today, we'll be walking through what calls GameStop stock to surge and how it could change the future of investing. Now quick disclaimer before we start, this is not financial advice, and all opinions expressed are my own. Alright, everyone. Let's jump into it.
Okay. So first some background, GameStop was founded back in 1984 and went public in February of 2002 as mainly a physical video game and consumer electronics brick and mortar retailer. However, in recent years, the world transitioned to a more digital society where there are more online video game sales than ever at around 83% just in 2018 alone, which was causing a threat to their business.
Then in 2020 was when GameStop was hit not only with a decrease in physical sales at their in store locations, but Most infinously, the coronavirus, which forced them to close most of their in store locations nationwide. However, despite GameStop stock being at record lows in August, it jumped to over a 1000% just a few months later. Now that we got that out of the way, let's discuss the logistics on how this was even possible to begin with.
Starting in 2020, a Reddit poster whose name is Keith Gil, Get a lot of traction on the platform by sharing his continuous investments in the GameStop despite the company's record low earnings and possibilities of going bankrupt. A few months later in September of 2020. While the pandemic was still in 4th force, Ryan Cohen, cofounder of Chewy, invested 76,000,000 into GameStop according to SEC filings. He invested intending to turn it into a potential Amazon rival.
This understandably attracted a lot of attention and hype, causing the stock of GameStop to surge over 28% as a result. After Cohen's investment, GameStop revealed in October, a plan for a partnership with Microsoft to continue growing their physical and digital stores, which resulted in another increase in the stock price. Now fast forward to January of 2021, GameStop announced that Cohen would be added to the board of directors for a quote, board refreshment.
Causing another increase in the stock price of about 13%. Now after all that, it brings the stock price of the company to around $19.94 days before the uproar. Now that brings us to Wall Street Bets, which is a subreddit in which users voice their opinions about stocks and option trading. In the subreddit, users uncovered that GameStop was one of the most shortest stocks in the market at the time. In fact, it was so shorted that more shares were shorted than actually exist for sale.
To put it merely shorting a stock is when an investor's self security with the intention to repurchase it back sometime in the future. For example, investor a loans 10 shares of Apple to investor b, who then sells the shares and repurchases them at a lower price. Assuming the stock price fell. And then returns it to investor a. The difference between what Apple shares were worth when investor be sold the shares and what he bought them back for is his profit.
Now this is basically the opposite of traditional investing and it's way riskier. In traditional investing, the most you could lose is the amount of money you put into the market. However, because of how short selling works. In theory, losses could technically be infinite. Alright. Back to the reason why the GameStop craze is so essential. After Reddit users discovered how shorted the stock was, they worked collectively to buy GameStop Shamus and hold them.
By doing so, investors who shorted the stock would have to buy at a higher and higher price if they wanted to cut their losses. But since Reddit users were planning to hold the stock, that would keep driving up the price until someone raises their hand and decides to sell. Now the importance of this is for years, hedge funds and institutional investors had majority control in the market to basically play in their favor.
Partially because it was difficult for the average person to even begin investing years back as commissions were as high as $50 per trade or more. In addition to the commissions, a minimum deposit of anywhere between 1000 to $20,000 was required just to open up a brokerage account and to avoid even additional fees. This system was basically designed for the rich to get richer and for the not so rich to stay that way.
However, in recent years, companies like Robinhood made it easier for the little guy to get in on the action by having commission free investing and no minimum deposits. Although this was an enormous step, the institutional investors still had majority control in the market But when the GameStop craze hit, it showed how much power a group of people on a subreddit could have to influence the markets.
See, when small investors can work together towards an objective on an open platform, that gives them a taste of what the institutional investors have been doing all these years. To have the markets play in their favor. A combination of having open platforms for collaboration and lower cost to get in on the action gives the little guy an edge, which is why it's not just re representing a game stop overhaul, but the future of investing.
Although, as the saying goes, with great power comes great responsibility, which is why investor education is essential to help keep the markets under control. And prevent random spurts of volatility and to prevent people from possibly losing money. Alright, everyone. Thank you so much for tuning into the MBIT podcast. I'm your host, James Madan, and I look forward to seeing all of you on the next episode. Disclaimer, the MBIT podcast is reflecting the opinion of only the host.
The podcast is for informational purposes only and is not a research report or recommendation to sell any stocks or security. The podcast is also not meant to serve as the basis of any investment decision.