Economics professor explains GameStop stock surge

Economics professor explains GameStop stock surge

Andrew Rasmussen, Opinion Editor (He/him)

The stock market volatility and social media hype surrounding the GameStop stock can be hard to make sense of.

Zhiguang Wang, DuBois Professor of Finance in the Ness School of Management and Economics, explains the situation.

The Backstory.

“A lot of players play different roles in this ongoing saga. First of all, the backdrop is that Robinhood has been a very popular broker since they started in 2013, and then in 2019 all major discounted brokers got rid of their commission,” Wang said. “Then we had this COVID-19 crisis this last year, so people in general, not just millionaires or college-aged kids, have a lot of time to participate in this stock market ‘game.’ They have, sometimes, a little more cash available to trade. So it’s easy to trade with zero commission and that will help the trading frenzy to develop.”

Many traders and investors initially thought GameStop was not a popular investment; however, some found fundamental value in the stock, meaning they think it could be worth more than the market price, Wang said.

Eventually, it was revealed that there are short-sellers, who are shorting more than what is available in the market.

According to the Associated Press Stylebook, “shorting” refers to “an investment used to describe the position held by individuals who sell stock that they do not own by borrowing from their broker in order to deliver to the purchaser.”

Everyone is pushing for this stock to go up, which basically cornered these short sellers.

“There are other players getting involved such as Robinhood, which is the broker, Wang said. “One time they stopped trading … they stopped buying GameStop and some other related stocks which forced the traders out of their position.”

Retail traders using Robinhood could only sell their shares and could not purchase more, according to Wang.

“In a sense, it is unfair in some ways and clearly characterized that way.

The regulators are sitting on the hot seat at the moment because this issue could be very serious market manipulation. You can say you like a stock, but not intentionally manipulate the market.

‘Do (the brokers) have the right to cut off (trade)?’ And what is the reason or rationale behind them cutting off the traders at, probably, the least opportune time? Right after that [trade cut off], the price dropped probably 50% right away.

It is in a sense a very messy situation.”

How has social media impacted the stock market, and will this type of socially driven trading continue?

“This is historical and unprecedented,” Wang said. “We can always make some connection or relate to the tech bubble in 1999, early 2000s. The magnitude is way different.

I think this is going to continue at least to some extent, I wouldn’t say to this degree.”

“Zero commission [brokers] are not going away, retail traders will still have a lot of influence and there will be some regulations about what can be said and what cannot be said. There will be more strict enforcement of the manipulation rule. It is still a very hard thing to do, in this environment with social media, it is very hard to police every environment possible about what they say and what they do.

It’s going to continue, but regulation is probably coming in some way.”

What advice do you have for students looking to get involved in the stock market?

“Do not blindly chase the hottest thing when it comes to trading and inventing,” Wang said. “The herding behavior is very dangerous. You can push the price up and you can hurt those short-sellers, the ‘villains of Wall Street.’

The movement, there is justification. I can understand the anger or disfranchised feeling Gen Z has for millionaires. I have full compassion, and it is not like they are fully out of their mind or crazy.

At the same time, you need to think on the back end what will eventually happen. The stock price is not sustainable at the $300, $400, $500 level for GameStop. There is no way, fundamentally, that you can justify that.

Learn even more finance, trading and investment before you take such a large risk. You can’t just say, ‘I watched some YouTube videos and I watched someone show some technical analysis of buying stocks.’

I would encourage them to learn a little bit of finance and trading in a more formal way.”

What resources does SDSU offer for students looking to get more exposure to the market?

“We do have the Ness School of Management and Economics. We do offer many different financing classes like business finance, investments, managing an investment fund. Students manage real money, about $400,000 in a proper way.

We also have an investment club, and we meet every other Thursday. The members can play using $1 million in virtual money.

They can also learn from other members and learn from professionals; we have all kinds of speakers. There is no cost to learning through this social, more informal platform.”