Breaking Down the GameStop Headlines
A Quick Review
GameStop, and the retail traders who have caused its stock prices to soar, continue to dominate headlines. Here’s a quick review of what has happened.
Shares of GameStop, a brick-and-mortar video game retailer, have surged by close to 8000% over the past six months. Retail traders, generally meaning people who are not part of the Wall Street establishment, have connected on social media platforms and encouraged one another to buy and hold shares of GameStop and other companies like the movie theater AMC, driving the prices of these stocks sky-high. This phenomenon has caused a number of large hedge funds who bet that GameStop shares would drop in value, to lose money.
“Short Selling,” “Short Squeeze,” and Other Terms Explained
Professional investors often engage in what is called “short selling” when they expect the price of a stock to fall. This means they borrow shares of a company then immediately sell them. The investor bets that the stock price will then fall so they can purchase shares at a lower cost, return them to the original lender, and pocket the difference in price. Traders must have a margin account to open a short position. They pay interest on the value of the borrowed shares while their position is outstanding.
In other words, while many investors follow the “buy low, sell high,” motto, short sellers do it in the reverse order: they borrow and sell stocks when they are high, hoping to make money when they fall. However, if the price of a stock rises when a short seller expects it to fall, they have to buy the stocks at a higher price rather than a lower price in order to return them. This situation is known as a “short squeeze.”
A number of hedge funds trying to short GameStop have found themselves in this position. A recent analysis showed that short sellers have lost $23.6 billion on GameStop just this month.
The Broader Impact of GameStop’s Wild Ride
The recent battle between Redditers and hedge fund managers goes beyond the price of GameStop stock. Some say that this marks an important step in creating a level playing field, where groups of ordinary people, not just the Wall Street establishment, can impact markets. Earlier today, some online trading platforms and clearing firms made the decision to temporarily limit trading of GameStop and other highly volatile stocks. This drew criticism from lawmakers on both sides of the aisle, including Alexandria Ocasio-Cortez and Ted Cruz.
On the other hand, some are concerned about recent trends and argue that there is too much speculation and enthusiasm impacting markets at the moment. These people say the share price of a company should be tied to its fundamentals, not to trends on social media.
At market close today, Gamestop was down 44% after hitting an all-time high the previous day. During after-hours trading, though, it was trending up. Traditional investors as well as retail traders will be anxious to see if GameStop’s wild ride continues.
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