Video Game Retailer GameStop Experiences Historic Short Squeeze
GameStop, a brick and mortar video game retailer which has tumbled into rough financial shape only exacerbated by the pandemic, has suddenly surged in stock price, somewhere around 6,000 percent over the course of just six months.
This seemingly random surge is the result of a David and Goliath-like struggle between major hedge fund Melvin Capital, and amateur retail investors organizing on the Internet. Coming out of a long-held frustration due to the latter being locked out of lucrative opportunities, this battle on the stock market is historic in more ways than one.
But first, it's important to define a few terms. The “stock” of a publicly-traded company is defined as all of the individual shares owned by the investors in a company. Investors make their living investing in lucrative opportunities with hopes of making a profit. A hedge fund is a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of generating such profit.
GameStop, like many downward-trending companies, has been subject to short selling, where professional investors borrow stock on margin to sell, then buy back to return once the price of the shares have gone down, generating profit from the difference. They’re basically betting on companies failing to generate a profit for themselves - and GameStop has been one of the most shorted companies in recent memory.
Then GameStop became the center of what's called a short squeeze, where the price of a stock actually rises (contrary to predictions) and the short seller is forced to buy stock to cover their losses. Due to chatter in online trading message boards and positive encouragement from Tesla CEO Elon Musk, the stock prices of GameStop soared, so the short sellers had to cover the stock they borrowed and sold at a high price by buying them back at an even higher price. It has now been estimated that these professional short sellers have lost upwards of 20 billion dollars this month on GameStop.
So what message board drove up the stock price? R/wallstreetbets, a subcommunity on the online message forum Reddit, was crucial for building the momentum for the investment movement that led to the short squeeze. Investment app Robinhood, the unofficial favorite of many investors on the forum, also played a role, as it lets anyone trade stocks for little to no charge.
Why is this important? Well, for one, never have amateur investors outplayed a hedge fund at their own game. In fact, other short-sold companies saw a bump in their stock prices as well, such as AMC and Bed Bath and Beyond. It has been suggested that these amateur investors could start to play a major role on the stock market, acting as almost a watchdog, checking the power of major investment firms and discouraging practices seen as unsavory. Whatever the case, it’s certain that the landscape of the stock market will have to adapt to this new class of investors.