GameStop (GME) is currently experiencing an interesting battle between hedge funds (short sellers) and social media investors (stock buyers) that is quite remarkable.
A group of Redditors, WallStreetBets, has launched a campaign that targets Wall Street investors short selling the GameStop stock. It has caused the stock price to rapidly rise from $93.35 (on Monday) to $347.51 (end of today). Shares were barely above $4 in July of 2020 so it’s been on a huge bull run.
There hasn’t been any recent news from GameStop that would justify the price increase, so a short squeeze is the likely explanation and the recent news seems to confirm this. Retail investors are flocking to purchase shares of GameStop, which is causing those with short positions to cover at huge losses.
Basic Explanation: A short seller is someone that feels the stock price will drop in the future, so they essentially borrow shares to sell now and seek to profit when they purchase shares (cover) at a lower price. There is quite a bit of risk involved with this type of investment. You can potentially lose many multiples on your original investment in the event of a short squeeze. So most retail investors (the non-Wall Street investor) avoid this type of investing strategy.
With GameStop, the rise in share price is causing a short squeeze where the large investors (e.g. Hedge Funds) are having to cover their positions (buy shares) at a higher price. Without going into all the details of how this works, just know that these investors are basically forced to cover when certain requirements are met.
Today, we saw the Securities and Exchange Commission (SEC) step in to investigate whats been going on. Because of the volatility, trading was halted multiple times during market hours this week. The SEC will likely investigate all involved to see if this stock was illegally manipulated.
What are your thoughts on this GameStop story? How do you think things will play out?
