Daniel Tortis, Director of Digital Media
Gamestop in the 2000s and early 2010s was a successful American company. It was a brick and mortar retailer that sold video games, consumer electronics, and gaming merchandise. Due to the pandemic and changing consumer preferences, sales have been dwindling. Selling physical copies of video games used to make up a huge portion of Gamestop’s revenue however many gamers now prefer to buy their games digitally. However, in the span of one month, the stock moved from $20 to a high of $340 USD which is the highest it has ever been by a mile. How did this happen when fundamentally this business is deteriorating? One large Reddit community with bold ambitions.
This Reddit community r/WallstreetBets along with other retail traders noticed that the GME Stock stock was heavily shorted. GME was shorted at a rate of 140 percent meaning more people were shorting the stock than there were stocks in existence. According to Investopedia, short selling is when an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender. Short sellers are essentially betting that the stock they sell will drop in price. This Reddit community knew that if they all acted in tandem by buying GME stock the stock price would increase and they would trigger a short squeeze. This would result in them all realizing massive profits at Wall Street’s expense. You might be asking: what is a short squeeze?
A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals. A short squeeze occurs when there is a lack of supply and an excess of demand for the stock due to short-sellers covering their positions. Due to the massive increase in price every person who was shorting the stock had to purchase it in fear of the rising stock price making them suffer huge losses. GME was shorted by average individuals but mainly large investment firms suffered the greatest blow. Short investors collectively are down $25.87 billion on GameStop alone and that number could continue to increase over the coming days.
This short squeeze was planned ahead of time and is still occurring as we speak. No one knows when the share price of Gamestop will reach its peak and some have even said it could easily get to $1000.
These short squeezes have not stopped with GameStop. Other heavily shorted companies like AMC and BlackBerry have also started to experience rising share prices without any news to truly match the magnitude of the price increase. If you are thinking of getting in on the action of these short squeezes, understand the huge risks you are undertaking. If you buy and sell at the right time you could earn multiples of your money but if you don’t you could lose over 95 percent of your money.
For a long-term investment, you are destined to suffer huge losses when the stock prices come back down to earth. A short squeeze of Volkswagen happened in 2008, but it was not even close to this magnitude. This stock squeeze and rapid price increase of GME stock is unprecedented and we are truly experiencing financial history in the making. All because of one group of Redditors with a lofty goal and the resolve to make it happen.
Photo by Tiffany Hagler-Geard, Bloomberg