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GameStop is a video game retailer that was mostly ignored by the majority of investors prior to the events of 2020-2021. Due to an outdated business model, not many investors were interested in buying shares in the company. This caused GME to have a very bad run in the stock market.
As usually happens, this opportunity was used by hedge funds to short the stock thinking that it will keep crashing and eventually go to nothing. Shorting in the trading industry is employed when one believes the price of a certain stock will fall. To make profits from the market conditions, these investors are borrowing shares from individuals or companies to sell them at a higher price.
Once the price drops, investors buy the shares back and give them back to their initial owners. This way, hedge funds make profits from the price differences, and those who borrowed the shares make some money by charging commissions.
This is a very popular tactic in the stock market. While the hedge funds hoped to make profits from GME shorting, things didn't go as planned. In fact, many of them ended up losing a lot of money.
But, how did this happen exactly? In today’s GameStop short squeeze article, we are going to discover how things went down. So, without further ado, let’s see how things played out for GME.
The GME short squeeze was one of the most significant developments that had taken place in the stock market over the past few years. To describe the process in a simple manner, it was an attempt of retail traders to go against hedge funds and play against them using their own rules.
Things started from one of the Reddit forums, r/WallStreetBets, where one of the users posted information about how heavily GME stocks were shorted. The user called on the members of the forum to start buying the company's shares, potentially increasing its price.
At first, things were moving at a slower pace, but soon word got out and investors from every corner of the internet got interested in this. People on all social media platforms started talking about the developments and calling on others to start buying shares of the company.
As a result, the price of GME increased drastically. In August, the price of GME was around $4 per share, and on January 28, it reached $437 in intraday trading. The majority of hedge funds thought that it was a short-term thing and the prices would go back to normal shortly after. But, things went even further, with people of all different backgrounds - including those who had never traded before joining forces to further rally GME's price.
As a result, the majority of the hedge funds that had previously shorted GME ended up losing much of their investments. This event had a massive impact on the stock industry and the same campaign was undertaken for other heavily shorted shares as well, for example, Blackberry and AMC.
Shorting is a very popular trading strategy, which is purely speculative. Short sellers believe that the price of a certain asset is going to decrease and they are trying to use this opportunity to earn some profits.
This is a very advanced investment strategy and, in most cases, only the most experienced traders or hedge funds use short selling. When short selling, a certain position is open using borrowed shares of a stock that traders believe will show a downward trend in the near future. After borrowing the shares, the investor sells them at the current price.
After the price drops further, the investor buys the shares and gives them back to the original owner. As a result, the investor is able to make profits according to the selling and buying price differences. However, this strategy is very risky. Theoretically, the price of a certain stock can have unlimited gains, resulting in major losses for those who participate in short selling.
When borrowing the shares, the investor is paying the original owner a certain amount of money in the form of fees. The longer it takes for an investor to give back the shares to the original owner, the more they have to pay in terms of fees.
If the prices start to increase, investors will have a hard time buying back the shares. When the prices increase instead of decreasing, it is called a short squeeze, and it is a huge disadvantage of the short-selling strategy.
We have already discussed the general events that took place in January 2021, but how exactly did things play out? To help you understand everything that took place in 2020-2021, we will now discuss the timeline of everything that happened around GME, starting from the period of bad performance, and ending with the impact of the GME short squeeze in 2020.
GameStop is an American chain of video game stores, which has struggled over the past few years to compete with other companies. One of the leading causes for this was the transformation of the gaming industry into a digitalized paradigm.
This, paired with the hardships that the Covid-19 pandemic brought, ended up being very damaging to GameStop. As a result, the price of GameStop's stock started decreasing dramatically.
Fewer and fewer people were using the services that GameStop had to offer, and the company, on its own, did not seem to have been doing much to overcome the challenges. Investors had a negative attitude toward GameStop shares. Almost no one was willing to invest in this stock, as it seemed like it did not have a future.
Things got even worse as the restrictions hit the market due to the spread of Covid-19. Having to close the majority of the stores, GME lost even the smallest hope that anyone had for its stock price recovering.
Because of the performance of GME's stock, people who owned shares of the company started massively selling them, which caused even bigger drops. At some point, in August 2020, the price of GME was as low as $3.76 per share, making it a penny stock.
As the market experts were talking about the unfavorable conditions of GME, hedge funds in the industry saw it as an opportunity to somehow make profits. As a result, they started borrowing the shares of GameStop and selling them.
These hedge funds were almost certain that the price drop would continue far into the future, thinking that they would be able to make profits by buying the shares at a lower price.
Because of the situation with GameStop, it was reported by media outlets that GameStop was among the most heavily shorted stocks in the market. In fact, on January 22, it was noted that almost 140 percent of public GME short float was being sold short.
This means that not only were the shares of the company shorted but they were borrowed and shorted once again. The majority of research and analysis had shown that interest in shorting the company had exceeded 100 percent. Such a high GME short percentage made it a great option for a short squeeze. In fact, it was noted that such a thing had only occurred in the stock trading market a total of 15 times in over a decade.
Simply put, the performance of GameStop was perfect for shorting and this opportunity was heavily pursued by individuals in the market. But, while hedge funds thought that they had everything under control, things took an odd turn.
For decades, retail traders thought that they did not have much control over the market. Many of them even blamed hedge funds for controlling the market prices in their favor and using their power to make even higher profits.
As a result, retail traders had some hard feelings toward hedge funds. Suddenly, one of the members of the Reddit forum, r/WallStreetBets, posted information about GameStop. Discussions started on what could be done to strike back and steal control from the hedge funds.
A huge campaign took place, with retail traders calling on one another to start buying shares of GameStop. Things quickly started becoming more global, with posts about GameStop appearing on almost all social media platforms.
As some of these efforts managed to cause little price movements, the media’s attention was quickly caught. As a result, more people started learning about what was going on in the market and joining forces to go against hedge funds, giving them a taste of their own medicine.
Things got to the point that even those who had never invested in stocks before started buying shares of GameStop. Such a huge demand for GameStop shares caused a massive price increase of the stock, and at some point, it increased to an intraday high of $483 on January 28.
The events taking place in the market could not have possibly been predicted by anyone as the GME stock short interest was huge. Everything that happened was simply caused by market manipulation, performed by thousands of people around the world.
Because of this, no one was ready for such developments, not even hedge funds, who had shorted GME. Such a huge short squeeze had massive consequences on the market, and the majority of people who had shorted GME ended up registering massive losses.
Among the biggest losers due to these developments was Melvin Capital, which is an investment fund. This fund had heavily shorted GameStop, and by January 28, they reported a loss of over 50 percent of its value. The events of January cost those who had shorted the shares of the company billions of dollars. It was reported that some of the hedge funds lost over $2 billion dollars.
One of the worst things for those who had shorted GME was that there was very little they could do. If they decided to not close the positions, they would end up not only increasing their possible losses but also would be required to pay higher fees as the shares were borrowed.
On the other hand, if they bought back the shares, it could potentially further increase the price of the stock as demand would have increased.
After a few weeks, Redditors decided that there was more that could be done against hedge funds. While everyone was focused on the developments around GME, retail traders started short-squeezing other heavily shorted stocks.
The campaign for these other companies was very similar, although none of them ended up causing such huge complications in the market, they still had some kind of impact.
The same group on Reddit started a campaign for another company, AMC Theaters, on January 27. The company had a very similar situation to GameStop. Similar things also took place around BlackBerry, Nokia, and several other stocks.
Due to these developments, many of the crypto trading apps in the market, such as Robinhood, for example, decided to halt offering traders buy positions on these stocks. They justified this by saying that it was due to unprecedented volatility in the market. The steps taken by these companies were followed by a massive backlash in the market.
The primary aim of these developments was very simple. Retail traders were simply tired of hedge funds and larger corporations controlling the industry and influencing price movements to earn more profits.
While trying to find ways to let hedge funds have a ‘taste of their own medicine’, some retail traders found these short squeezes as a way to strike back. In fact, many of the retail traders were even saying that their main aim was not to make huge profits, but rather to showcase the power they had.
The impact of these developments was huge on the crypto industry. Starting from crypto mobile platforms restricting their users, to US senators making comments, and talking about the need for change in the market.
The impact was truly huge. It went so far that companies like Netflix and MGM announced they would be working on movies based on these developments.
Numerous things were in play during the developments of the GME short squeeze of 2020-2021. However, the most important player in these developments was social media, which played a huge role in spreading information and attracting more people to take part.
Statements of influential people further affected the ongoing events. Things went even more viral when people like Elon Musk started showcasing their reactions to the ongoing events. Musk wrote on Twitter "Gamestonk", sharing the link to the Reddit forum. Referring to a popular meme saying "stonks" instead of "stock".
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GameStop was among the most shorted stocks in the market. After noticing the pattern, members of r/wallstreetbets came up with a plan to start buying the shares of GameStop and try to increase the price. Because the stock was so heavily shorted, it made perfect sense to short-squeeze this stock.
GameStop was shorted so massively because it was performing very badly in the market. The gaming industry has very much transformed into an online world over the past few years and this, paired with the Covid-19 pandemic, left GameStop in a very bad situation.
On the other hand, hedge funds and large investors saw this as a great opportunity for shorting the stock in order to make higher profits in the future. The GME short squeeze had a huge impact on the whole industry.
One of the main reasons behind the short squeeze in 2020 and 2021 was to show hedge funds the power that retail traders had. Many of the r/wallstreetbets members were saying that their aim was not to make profits but to show hedge funds that they also had some control over the developments in the market.
However, as things went on, many people decided to participate in the process specifically for making profits. Simply put, everyone had their own reasons behind participating in the process of triggering a short squeeze.