This online forum consisted of retail (non-financial professionals) investors who are known for risky stock trading. This news reached an online forum called r/wallstreetbets on the social media site Reddit. In early January, the hedge fund Melvin Capital decided to short-sell Gamestop shares as they believed that the company was going to go under because of the disruption of the pandemic on its business. What happened when Gamestop shares were shorted? In theory, if X buys a huge amount of shares, the losses incurred can be infinite as the price will keep increasing as X buys back more shares. But due to the market mechanism, once X starts buying shares, they are consequently increasing the demand, which further raises the price. Since person X needs to return the 100 shares, X starts buying them back before they start becoming more expensive. But the inside information received turns out to be false and the company will actually be celebrating some extra profits, which raises the value of their shares to $7. To take advantage of this situation, person X borrows 100 shares and sells them at the $5 market price. Through some inside information, person X got to know that the company is going to announce some bad news which would have made their stock skydive. Suppose company A’s share is selling at $5 per share.
But sometimes the stock price can rise, which can lead to huge losses for the seller. When someone shorts a stock, they are betting on the stock price falling. When the short-seller gets the information about a company’s potential collapse, they sell the stock which they have borrowed, wait for the price to come down (which is usually accelerated by the huge amount of shares the short seller sells), and then buy back the shares at a lower price, return the shares with some interest, all while making a neat profit for themselves.Īs mentioned above, shorting is a very risky trading technique. This valuable information is gained either through insider knowledge or through expert data analysis of the financial state of a company. In this sense, shorting seems like a trivial procedure, but the short-sellers are no fools they only plan a short-sell when they get information about a stock potentially going down in price.
They buy back the stock after a while and return it to the lender of the stock.They sell the borrowed stocks immediately.The short-seller borrows stocks of a certain company from someone else with a promise to return the stocks (along with some interest) after a certain amount of time.Shorting is a high-risk and somewhat unethical financial trading technique generally used by big hedge-funds (who can afford to take risks), who use their resources and inside knowledge about companies to influence the market and make profits for themselves. But before understanding what a short squeeze is, one needs to understand what ‘shorting’, or going ‘short’ on a stock means. The huge increase in the price was the aftermath of a ‘short squeeze’ of Gamestop shares.
However, in this particular case, Gamestop had done absolutely nothing. Usually, such a huge increment in the price of a share is the result of sudden discovery or the invention of a new product or process that would make a company very profitable. However, during the month of January, the stock grew exponentially and peaked at almost five hundred dollars a share. On January 1st, 2021, the Gamestop share was trading at $17.25.
The rise in the market value of the Gamestop share was the only event along with the Presidential Election and the BLM movement that took COVID-19 out of the front page news. However, for the month of January, “Gamestop” was the only word on the lips of stock market enthusiasts. It brands itself as the world’s biggest video-game seller, but in today’s age of digital and online gaming, it is slowly losing relevance. Gamestop is an old fashioned video-game retailer originating from Grapevine, Texas.
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