It is no secret that GameStop has been losing relevance in today’s market for a long while now. With an array of alternatives to purchasing video games at a brick and mortar store, such as Amazon or digital stores, gamers have largely abandoned GameStop as a place to spend their money. In the past couple weeks however, in a drastic turn of events in the stock market, GameStop’s stock soared to an unprecedented level due to the efforts of Reddit users on the subreddit r/WallStreetBets.
Experienced investors in the stock market, including several large hedge funds, noticed GameStops decline and decided to short its stock. For those who are unaware, shorting a stock means buying and selling a stock from a broker with the promise that those stocks purchased will be returned. Once the stock price falls, it is bought back for less money than it was sold for, and that difference becomes profit. This is a risk however, because if the stock rises instead of falling, one is forced to buy back at a higher price and lose money.
When users of r/WallStreetBets noticed the overwhelming amount of GameStop shares being shorted, they rallied fellow users to purchase shares, lowering the supply and therefore raising the stock price. This created what is known as a “short squeeze.” According to Time, a short squeeze occurs when “short sellers rush to buy up more shares to give back to their lenders,” which “drives up demand and reduces supply, further increasing the price and thus getting even more short sellers to buy.”
Investment management firms like Melvin Capital and Maplelane Capital sustained massive losses upwards of 45%. Average everyday citizens acquired hefty sums allowing them to pay off student debt, donate to charities, or simply provide for their families. At the end of the day, this unlikely event will not last long. GameStop’s stock will quickly lose value as the internet hype has already started to die down.
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