What Is Going On With GameStop?

The rally behind video game retailer GameStop’s stock market price has caused quite a commotion in the financial world. As of this writing, short-selling hedge funds had hemorrhaged billions of dollars in losses.

Money expert Clark Howard says he knew the news had gone beyond the business page headlines when his teenage son asked for an explainer on the GameStop saga. “He’s looked at GameStop as a has-been loser for a long time,” Clark says. “They’ve closed tons of stores, there are stores that are still open,” but it’s all been “kind of sad.”

Clark’s Take on the GameStop Frenzy

But it’s not sad anymore, at least not in the short term. Fueled by Reddit investors, GameStop’s stock price is soaring.

But how will this all play out? Are there any investment lessons to learn from the GameStop rally?

Let’s get Clark’s take on the GameStop situation and at the same time answer some questions you may have about the stock market.

“GameStop really doesn’t have a lot of intrinsic market value,” Clark says. “Wall Street’s big-time money people have been playing a game called ‘shorting the stock.’”

What Is ‘Shorting’ a Stock?

Shorting a stock is a trading strategy: Investors borrow underperforming stocks, sell them and then turn around and buy the stocks back at a lower price in order to return them to the lender. The difference between those two sales is the investor’s profit.

“The idea is that the big-money crowd on Wall Street had been betting on the extinction of GameStop. What the small investors — a lot of people in their teens and 20s — have been doing is the opposite,” Clark says.

Because these new investors have been keeping the value of GameStop up, the investors and hedge funds that bet on the store’s shares dropping have had to do what’s called “unwind” their positions.

What Is “Unwinding a Position” in the Stock Market?

When traders unwind a position, that means they close out the trade: They settle up. The term is often used when dealing with large, complex trades.

In this case, “unwinding” means those hedge funds have had to buy shares of GameStop stock at a steadily rising price. “As they buy more, that pushes the price up in order to close out their positions and limit their losses,” Clark says.

Isn’t Stock Market Manipulation Illegal?

Some observers may wonder if what the Reddit investors are doing is within the rules of the Securities and Exchange Commission (SEC), which regulates the stock market.

“Generally when people collude, that is an illegal activity, but this is not traditional private collusion,” Clark says. “These are individuals on message boards, and as best as I understand securities laws today, it’s not at all illegal.”

Of course, because of the high stakes involved, some litigation is to be expected.

What Is the True Value of GameStop Stock?

Clark says the larger issue for those pushing up the price of GameStop and other Reddit-fueled stocks is whether the shares are actually valuable. In other words, there should be a correlation between the stock’s price and the company’s real worth.

Clark says when it comes to GameStop, he just doesn’t see it.

“The reality is these stocks that are being pushed up have none of the intrinsic value that the market suddenly is saying they’re worth,” Clark says. “And so this is going to end where it usually ends, with a bubble, and the value of these stocks are going to deflate.”

“It is what they call in investing theory, ‘the greater fool.’ Who is the last one standing who rides it all the way down? You don’t want it to be you being the one who has to say, ‘Coulda, woulda, shoulda sold earlier,'” Clark says.

Final Thought

Investing can be overwhelming, especially in these unique circumstances. It’s important to remember Clark’s simple approach to saving and investing.

“Over the long haul, the way you make money is being a turtle: slow and steady. No flash to it,” Clark says. “And I know for a lot of people, that’s boring; that’s dull. I want to build wealth and security so that my life doesn’t have to be as dull as my investing strategies.”

That may be dull to some people, but it’s the smart way to invest.

“You always start really wide with ‘Dullsville,’ where you own large swaths of the stock market for the long haul, then on the edges of that … if you want to do stuff like [invest in a frenzy], which is really gambling, then go right ahead. But never bet the real money you need for your future on it.”

To hear Clark’s full take on this topic, listen to the segment: