GameStop is a retail chain store in the United States and Canada with over 5,000 locations. Best known for selling video games, and staying open during the global pandemic, risking the health of thousands of workers. This may be because, for the last several years, they have made no money at all due to game sales increasingly going digital. Their stock market value has continued to plummet. What has not helped this are the people trying to get rich off of the losses.
Short sellers of various levels, from individuals, to small groups, and even two massive Wall Street Hedge Funds, have been making money hand over fist because there has never been any upward change in GameStop’s stock prices. What they do is borrow shares from people who already own them, sell them, and then buy them back at a lower price, to then give back to the people they borrowed them from, keeping the money. They add and contribute nothing, simply leeching off the system. This has driven the price of shares down from $25 per share in 2017 to $4 per share in 2019.
Many have seen this, with some joining in to make a quick buck, but others have had different ideas. On Wednesday Jan 27th a group of Redditors from r/WallStreetBets decided enough was enough, and to stick it to these leeches. With a focused amount of buying they sent the price souring up to $400 per share, an over 1,000% increase. This means that the people who borrowed the stocks are now in what is called a “short squeeze” as the short sellers now need to buy into a rising market, or are left with nothing. This may actually be one of the largest examples of a “short squeeze” in history.
The theory behind all of this is that if enough people buy into a company, raising the stock price, and then refuse to sell, short sellers will be forced to buy at higher and higher prices to cover the bets they made. The harder and harder it is to find cheap stocks to cover the short, the more and more expensive it will get, forcing short sellers to buy at higher and higher prices to cover their bets. This in turn makes the price even higher than before, at least until regular market forces once again take hold.
One of the Reddit members credited with starting this movement has claimed to have turned an initial investment of $50,000 into more than $20 million, by buying and holding onto his shares, and convincing the community to do the same. One of the extra steps taken was to instruct their brokers to not allow their stocks to be borrowed at all, which reduces number of stocks available to be shorted.
Borrowing stocks costs money, generally around one third of the normal price of buying it, this is to help make the people who own the stock make some money from it. At this point in time the current price to short the stock is $100, meaning that in order to make a profit the stock price would need to fall by at least that much, which the Redditors are making sure it doesn’t. At current count, GameStop short sellers, including two massive Wall Street Hedge funds, have lost around $5 billion dollars as a result of this move.
This is not a lone incident either, it is happening to other companies with consistently falling stock. BlackBerry a once powerful tech-giant is up 500% since Christmas, AMC is up 300% since Wednesday, and Bed Bath & Beyond is up 250% since early December, with even candy company Tootsie Roll seeing some gains this week, with the shares going up on Wednesday as well.
These companies have little to nothing in common, other than that they were being leeched off of by short sellers on Wall Street, and are now the targets of those wanting to create more “short squeezes”, making themselves rich off the backs of the huge, comfortable, investment groups. The CEO of an investment research group, Dan Kent, says that he has noticed this trend happening far before this Wednesday. “This is definitely a rise of retail investors that are essentially sick and tired of these companies coming out and short selling these stocks,” he said in an interview.
Short sellers and Wall Street hedge funds will now need to be very careful when deciding to ply their blood sucking trade in the future.