Weekly News Highlights: 1/25/2021 – 1/31/2021
GameStop? Reddit? Explaining what's happening in the stock market
Like many retailers, the video game retailer GameStop had been suffering during the pandemic, as people have been moving away from physical products and moving towards online alternatives. Many were increasingly buying online games even before the pandemic, though the pandemic likely accelerated this trend. Consequently, many professional investors and hedge funds have been short selling the GameStop stock. Short selling is a method of trading in the financial markets in which an investor anticipates that the price of a stock will decrease in the future. They sell the stock, hoping to buy them back at a lower price. To achieve this, they borrow shares of the stock, usually from a broker, sell the shares to the market, and later purchase the shares again and return them back to the lender. If the price of the stock decreases between the time that the investor sells the shares and repurchases them, they will profit from the difference between the stock prices. However, if the price of the stock increases, then the short seller will lose money.
So what explains the the price of GameStop skyrocketing 8,000% over six months, and short sellers losing $23.6 billion on GameStop this month? Although there are different factors, the major one is what has gone down in the Reddit community called r/wallstreetbets, or WSB. The goal of the tens of thousands of amateur investors and teenagers in WSB was to raise the price of the GameStop stock — or "Gamestonk," as Elon Musk described it — by collectively purchasing numerous shares of the company. By doing so, they would increase the price of the stock, causing the many hedge funds and professional investors short selling the stock to lose enormous amounts of money. After January 11, when GameStop named three people to its board of directors, there was more news coverage on the company. Soon, the number of shares bought by WSB skyrocketed, which in turn caused the price of GameStop to soar. Consequently, a short squeeze occurred, whereby the short sellers had to give up and take losses. Essentially, so many amateur investors in WSB purchased shares of the GameStop stock that they were able to make the price of the stock surge, even toppling hedge funds and professional investors that were predicting the stock's downfall.
Typically, a short squeeze will end and a stock's price will fall back to the price that it was at before all the chaos.
The drama still continues, with WSB going after other companies, such as AMC Theatres and Bed Bath and Beyond, attempting to induce a similar short squeeze that occurred with GameStop.