GameStop is a company that was not very popular, surely some people have bought video games in one of its stores, perhaps adults remember taking their children to a store to buy them a video game. Although it was a well-known company, it was not as present in people’s minds as it has been in recent weeks.
What happened with GameStop was an explosive increase in the value of its share, in a phenomenon known as “short squeeze” or a throttling of short positions. Let’s see why this happened with this company.
What was GameStop’s outlook prior to the event?
This company had a negative perspective on its business, due to its traditional scheme as a video game store, in an industry where everything has migrated to digitization. This, in addition to its poor financial performance, caused many funds and investors to position themselves short with this company, that is, they believed that its price was going to fall.
On the other hand, Ryan Cohen, who was the former director of Chewy, an online pet store, began investing in the company since August last year, beginning to take an increasingly important position among partners. His participation focused on offering the board the idea of investing in the digitization of the business, something that I liked and they were awarded positions within the company for it.
January 11 was his first day on the company board, which quickly caused some people to change their perspectives on this company. But despite this, many large funds and investors held open short positions.
What are short selling and how is a short squeeze done?
Short sales are operations that take place on the stock market. These are done when the value of a stock is believed to fall. The idea is to sell a share that is not owned by the seller, that is, to borrow the share for sale, usually the loan is made by a broker.
When the price of the share falls, the person buys the share again, returns it to the person who loaned it, and the remaining difference is the profit from the operation. The more the value of the stock falls, the greater the profit that is obtained. These operations are usually done by large investors and risk investors.
These positions are sensitive to short squeezes. These are very accelerated increases in the price of a share, they are explained by technical factors rather than fundamental, so they tend to disappear quickly.
In a short squeeze the value of the stock begins to rise, generally due to liquidity issues, this causes those who have short positions to lose. Many of these people, seeing such a rapid increase (in the case of GameStop, the stock went from 40 to more than 400 dollars) are forced to buy the stock, assuming a loss, to avoid an even greater loss, which increases demand for the stock and keeps its price rising.
How does the Reddit forum intervene?
The short positions of the funds were so many that they exceeded the total of GameStop shares, this happens because whoever bought the share also lent it and made a chain with the company, this strongly compromised liquidity when they wanted to buy back to action. On a Reddit forum called Wall Street Bets they noticed this, calling on small investors to buy GameStop shares. This caused the short squeeze to be triggered and the stock’s value skyrocketed very quickly.
Sites like https://sijoitusrahastot.org/paivakauppa/ could be a good place to learn short sales.