GameStop dominated Wall Street in an odd financial tug-of-war. Investors on Reddit bought up the stock after big hedge funds had sold the stock short, essentially betting it would go down.
GameStop’s stock price skyrocketed and short-sellers lost billions. Talking heads scrambled to make sense of the event. But one of the most brain-melting assessments of the GameStop short squeeze came from Bloomberg TV guest and President of Financial Insyghts Peter Atwater. Atwater was so perplexed that he actually compared individual investors on Reddit outsmarting the big short-sellers to the Jan. 6, Capitol Hill Riot during a segment on Bloomberg TV:
"This has got anger behind it. And the behavior of the mob in many ways reminds me of what we saw two weeks ago at the Capitol. It’s a mishmash of a whole lot of people."
Yikes.
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In case you are like me, I had to find a simple explanation about what is going on....
Millennials versus elitist boomers, amateurs versus professionals — however, you want to call it, the group of Redditors that blew up GameStop's share price this week has the internet abuzz.
The struggling bricks-and-mortar U.S. videogame retailers' recent stock price surge goes far beyond videogame sales and has been cast by some — in grandiose fashion — as a paradigm shift.
We've taken a look at the why, how, and when of the situation for those who know little about it or who want to be brought up to date.
What is a 'short'?
The single most important trading term to understand in the whole GameStop stock surge story is "short." A "short" is when a trader borrows stock from a broker and immediately sells it at the current price.
The short seller bets on the stock price falling so that they can buy the stock back at a lower price and return it to the broker.
The short seller makes a profit out of the difference between the original price at which they sold the stock, and the price at which they bought it back.
For example: if they sold borrowed stock for $20, and bought it back at $15, they make a $5 profit.
Of course, short sellers take the risk that the stock they sell may in fact rise exponentially in price. When that happens, they must buy back the stock at a loss.
What started the GameStop Reddit stock surge?
A few weeks ago, a Redditor on subreddit r/WallStreetBets discovered that a hedgefund had bought a large amount of "short" stocks in GameStop.
The hedgefund was betting on GameStop share prices going down over the coming months and years due to the recent surge in digital purchases and physical game sales going to online retailers such as Amazon.
The Redditor convinced everyone via a thread on the WallStreetBets subreddit to buy as much GameStop stock as possible to make the stock price rise — in the past week, GameStop stock rose more than 300 percent.
Reddit-coordinated 'short squeeze'
The rise in GameStop stock prices made the hedgefund lose billions on its short position as it had to buy back the sky-high shares it owed. When it closed its short position and bought back the stock at these elevated prices, GameStop's share prices soared even further.
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https://interestingengineering.com/gamestops-reddit-fueled-stock-surge-explained-in-simple-terms
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