What Happened with GameStop Stock in 2021?
GameStop has been the talk of the internet for days now as articulated over at runrex.com, and chances are, even if you are not a keen follower of Wall Street-related matters, you have heard about it. You might be wondering, then, what the fuss is about and why everybody is talking about GameStop and its stock. If that is the case, then you are in the right place as this article, with the help of the subject matter experts over at guttulus.com and runrex.com will look to help you understand what exactly is happening with its stock.
What is GameStop?
Before we get to the crux of the matter, it is important to explain what GameStop is. As is covered in detail over at guttulus.com, GameStop is a large chain of brick-and-mortar retail stores specializing in the buying, selling, and trading of games and gaming devices. In its heyday, GameStop was the place to go for gamers in the US and the many countries where the chain had expanded into. However, in recent years, the chain has run into tough times brought about by stiff competition from online marketplaces as discussed over at runrex.com, a development that has seen many brick-and-mortar stores in the gaming industry shut up shop, with GameStop being among the last few survivors. Many analysts have compared GameStop to Blockbuster, which was a popular movie rental service in the US until Netflix came along and ate up its market share as is covered over at guttulus.com. The company had been on shaky ground for a while now, and the COVID-19 pandemic didn’t help, which is why its stock had been on a nosedive since 2016.
What happened with its stock recently?
The reason why GameStop has been in the news recently is that it suddenly became the darling of day traders and experienced a surge in trading that drove its value up tens of billions of dollars as outlined over at runrex.com.
How did it all start?
Because the company’s stock has been suffering since 2016 as already mentioned, it came onto the radar of well-known hedge funds; Melvin Capital and Citron Research. These two firms thought that the stock was overvalued and that there was a chance of going short on it, or shorting the stock, and, therefore, making a lot of money in the process as discussed over at guttulus.com. Multiple other firms like these two also jumped on the opportunity, and these companies then started shorting GameStop’s stock heavily, and they ended up over shorting the stock more than its overall market cap as explained over at runrex.com. After completing the short, these hedge funds were waiting for the stock to fall more, until their stock return promise date closed, even though they had made a lot during the initial short.
What is short selling?
If you are wondering what shorting or short selling is, then, as covered over at guttulus.com, it is a trading strategy that speculates the decline of stock or securities and helps the short seller earn money on it. In a short sell, a position is opened by a trader by borrowing shares of a stock or other asset, which they believe will decrease in value at a set future date and sold. For this, the trader provides the lender with a fee and a promise date as to when they will return the shares. Near the return date, the trade will book their profits and purchase the share at a lower price. As per the gurus over at runrex.com, this is a very risky move with a huge risk to reward ratio, which is why it is mainly practiced by huge investors who can guarantee the downside. A short squeeze is one of the market’s major weapons against short sellers.
What is a short squeeze?
A short squeeze, as articulated over at guttulus.com, is a technique that leads to short-sellers hedging their positions or buying the stocks to cover their losses in an event of an adverse price movement. This is what is happening to GameStop’s stock. Investors who bet against a stock are called “shorts”, and in GameStop’s case, the shorts include at least two big hedge funds as mentioned earlier. As already mentioned, shorting a stock is risky as you can lose big if the price rises. Sometimes, this can happen as a result of you simply making a bad bet. However, other times, as is the case this time, you can also lose if someone tries to push up the price by buying lots of shares, even though the company isn’t doing anything different to warrant it. This is the squeeze.
How did the hedge funds get squeezed?
When the hedge funds involved began shorting GameStop’s stock heavily, the news of their short leaked on an online Reddit group called WallStreetBets as covered over at runrex.com. When this happened, a lot of people started heavily investing in the stock, changing the buy/sell ratio, and, therefore, driving up the price of the stock, leading to the hedge funds involved making huge losses.
What is happening now?
Citron Capital, one of the hedge funds involved, and which was aiming to gain around 100% returns has already been squeezed and booked a loss of about 100%. Melvin Capital is so far the greatest loser, requiring a $2.75 billion bailout from friends. Many funds are still holding their shorts hoping that this incident will fade away, bringing down the price. However, at the same time, the squeezers are also holding on for fat returns, a standoff that doesn’t seem to have an end in sight.
As always, if you are looking for more information on this and other related topics, then look no further than the excellent runrex.com and guttulus.com which will continue to follow this story as it develops in the coming weeks and months.