This isn’t a movie. This is a story of how the internet and traders just like you took on Wall Street in an epic David vs. Goliath moment and won.
GameStop a retail video game store, which some would say is well past its prime, and has definitely been battered about by the pandemic, has surged nearly 1800% in 3 weeks.
How Did This Happen?
Things were not going well for GameStop. This high street game retailer was not expected to make money this year, the fundamentals were not looking good, and it was closing shops all over the place. The perfect short trade.
What’s a Short Trade?
This is when you expect the company not to perform well and to lose money. So instead of buying the stock, you sell the stock, (which you don’t own – so it’s like borrowing it), with the intention to buy to back later once the price has dropped. The difference represents your profit.
This is exactly what happened with GameStop. The Hedge Funds shorted this stock in what they thought was a sure bet, and simultaneously an army of stay-at-home traders started talking the stock up through a Reddit forum called WallStreetBets. They started buying $GME in force, thus catapulting the price higher.
Then Elon Musk got involved with a Twitter comment “GAMESTONK” thus pushing the price even higher.
Short Squeeze and Gamma Squeeze
So by now the Hedge Funds were being squeezed to buy it back quickly before their losses became even more colossal, but not that simple. The demand in the stock by now was astronomical, pushed even higher by what is known as a Gamma Squeeze- call options bought by investors that had been sold by brokers who had to then buy the underlying stock, thus increasing demand further and pushing up the price.
Pain For Hedge Funds
Meanwhile, this was causing real pain for the hedge funds who had to come up with huge amounts of money fast, as the stock gained over 455% in just the last week alone – The short squeeze.
And so, as the retail army got a taste for blood, realising they could do this with other shorted stocks if they all got together. This all starts to have a cascade effect on various other stocks, and assets like Silver.
Is This Legal?
This is not about the fundamentals of the stock. This is all one big game, and a very lucrative one for the winning team, as the SEC sits on the sidelines unable to do anything about this.
And that, in a nutshell, is how GameStop, a hapless, rather unsuccessful company stopped the show.