The GameStop Short Squeeze For Dummies In 5 Points
· On January 22, 2021, users of r/wallstreetbets or WSB initiated a short squeeze on GameStop. It resulted in a 600% rise in its stock value over the next few days. The stock prices increased from $19 per share to $483 per share on January 28. It happened after Citron Research had predicted that the stock price would decrease.
Hedge fund investors and Wall Street insiders lost millions of dollars. Even Elon Musk tweeted a link to the subreddit. On January 27, a short squeeze on AMC was initiated by WSB.
· Grand Valley State University economics professor Dan Giedeman has an easy explanation for short selling- “I borrow the stock from somebody. So let’s suppose we’ve got a stock right now that is worth ten dollars, but I think it is really only worth five dollars, so I can borrow the stock from somebody. I kind of have to rent it. You have to pay them interest. They’re not going to let you borrow it for free, but I borrow it from them and sell it for ten dollars on the open market. And then I wait until the stock price falls and I buy it back for six dollars. I hand it back to the person I borrowed it from and I get to pocket the four dollars in profit, so that is how you can make money by shorting a stock”.
The traders inflating the GameStop price were forcing hedge funds who were shorting the stocks to lose money. The hedge funds were paying the difference in the stock price, which was highly inflated. As inflation went out of control, Robinhood blocked sales of these stocks on their application platform. This caused massive online outrage and resentment towards the company.
· WallStreetBets or WSB is a subreddit on the social media platform Reddit where more than 10 million users actively discuss stock and trading options. It is famous for its aggressive trading strategies and its interest in “out-of-favor stocks.” “Out-of-favour stocks” like GameStop, AMC, BlackBerry, and Bed, Bath & Beyond are very broadly defined as ‘Meme Stocks.’
They are typically governed by the FOMO (Fear Of Missing Out) psychology, nostalgia, and standard community connections as opposed to company fundamentals. The dramatic price increase is fuelled primarily on Reddit, Twitter, and TikTok, and they are very volatile. For example, the millennial nostalgia for companies like GameStop combined with a stock opportunity that had the potential to materialize made it a “Meme Stock.”
· WSB faced temporary bans and disruptions from its Discord server. Robinhood, TD Ameritrade, E-Trade, and Webull restricted trading on heavily shorted stocks, including GameStop, AMC, BlackBerry Limited, and Nokia. Angered by such actions, members of the Reddit community plummeted the star ratings of the companies, especially that of Robinhood. Lawsuits against Robinhood were filed later.
Within a few days, WSB gained 2.4 million subscribers. The numbers rose to 9.6 million by April, and as of June 2021, there are 10.6 million subscribers. Reddit celebrated the subreddit — “underdogs can accomplish just about anything when we come together around a common area.”
· It is a social phenomenon born out of social media behaviors and distrust of Wall Street. It is fundamentally altering the marketplace and challenging the giants of the financial market. It has democratized the stock market, and it has earned a lot of respect for that.
