GameStop Short Squeeze
Updated: Feb 6, 2021
GameStop had become a major piece in a power struggle between hedge fund, Melvin Capitol, and a group of reddit traders. The struggling video game retailer was a victim of “short selli
ng”, where inves
tors borrow shares to sell and buy back later to net a profit. Ultimately, Betting the company will fail. For most investors they follow a “buy low, sell high” format, short sellers do the opposite. If the stock price rises after the investor sells, they are forced to cover their positions or buy more to minimize losses. This position generates a lot of risk since companies could receive positive news, pushing the stock price up and diminishing profit.
The Reddit community called r/wallstreetbets, created massive interest in buying GameStop stock, skyrocketing the price. The trading left short sellers with no more shares to buy to cover their position, creating a short squeeze which left hedge funds with millions in stock they bought at a high price then having to offload at an even higher price. GameStop would soar 400% higher this week, bringing its total gains to 1625%. Becoming one of the most traded stocks on the market. Melvin capital would go on to lose 53% of assets in January.
The big question surrounding these events remains how regulators and prosecutors will respond to the volatility, with lawmakers urging the SEC to act on investigations into potential market manipulation by retail traders, brokerages and hedge funds. The bull market rallied all time highs earlier this month due to recent stimulus expectations, vaccine optimism and blue chips surpassing earnings expectations this week.