Understanding the Basics of the GameStop Short Squeeze


Alessia Pierdomenico - Bloomberg

Outside of a GameStop store on Jan. 28, 2021 just days after the GME share price surged.

By Emily Chin, Staff Writer

In the past couple of days, news surrounding the GameStop short squeeze has been swarming all media contents. GameStop is just one of the many companies where the stocks are oscillating daily. What exactly is happening? Why is GameStop so popular right now?

If you’re new to stocks, you might be confused about what exactly is going on. Here are some of the thing you should know.

To start off, a term that everyone should understand is “short selling.” Short selling, also known as “shorting a stock,” is borrowing stock shares from a broker in hopes that the price will go down. By borrowing the stock, selling it when it’s high, then rebuying it when it’s low again, the short seller or hedge fund will be able to make a profit.

Hedge Funds are investment companies that use their client’s money to make a profit, most likely through short-selling.

What is happening right now is called “short squeezing.” Short squeezing is when the price of the stock increases rather than decreases. This forces hedge funds and short-sellers to rebuy or “cover” the shares at a higher price because it needs to be returned to the broker.

Investing teacher at Niles West Lou Metallo explains, “If you borrowed 1,000 shares of a company at $10 per share, you want to buy them back for lower than $10 to make a gain on your investment. The issue is if the price increases past $10 per share, then you would have to buy them back at a higher price than you borrowed them for.”

When the demand increases for that company, their stock price will also increase. Hedge funds like Melvin Capital bet against GameStop thinking its stock shares would decrease, but due to the viral knowledge–to buy GameStop shares–from Reddit, Instagram, Twitter, and numerous other social media outlets, the stock share price has been surging. In total, Melvin Capital lost more than 50% just in January because of GameStop and other bets they’ve made. Some investors have been buying stocks like GameStop in hopes of making a profit, while others are doing it for the pure enjoyment of making a financial dent in the hedge funds.

The comical part of this story is that this short squeeze situation was all fueled by the love and devotion of GameStop. Regular investors were angered by the fact that wealthy hedge funds devalued GameStop as a pointless and failing electronic store, so they took matters into their own hands. These investors got others to buy into GameStop at a record rate, ultimately rising GameStop’s stock price and crushing the large base these hedge funds once stood on.

Another factor why share prices were either increasing or decreasing was because of Robinhood. Robinhood is a commission-free stock market investing resource that has received a lot of controversies. After the market frenzy that occurred last week, Robinhood halted trades for a couple of days on companies that had soaring share rates and have now limited the amount of shares investors can buy. Investors are enraged that Robinhood is controlling the market and are questioning whether this was to help hedge funds or to regulate the frenzy. Now Robinhood has received numerous class-action lawsuits against them for trying to constrict trading within the market.

If you are interested in buying GameStop, it might be too late. The stock price of GameStop (GME) as of Feb. 1 was $225.00. Since the share price has already reached a high, there’s a minimal chance that it will go even higher.

“There’s a whole buy low, sell high adage of the stock market, and you don’t want to buy it when it’s high and get stuck with it when the price falls,” economics teacher Shaun Waldron said.

Waldron suggests to students who are new and interested in buying stocks to “Make sure you diversify so that you have some stocks you just don’t touch that are good investments 10 years, 20 years from now, and are going to give you a nice profit. Only use a small portion of your money for this kind of really volatile stuff because if you put it all in, you could risk losing it all. Only do the risky stuff with the money that you can afford to lose. So I would say, be careful.”

“The GameStop situation is making people aware of the market, which is a great thing. However, people think getting rich quick is easy, but it isn’t. First, there is luck involved in buying and selling at the correct time. Second, the market has gained 70% over the last eight months, and that is very unrealistic. It is not going to remain that way. Buy for the long term, and you will be fine,” Metallo said.

The stock market is a serious game of risks and rewards, so when and if you invest, remember there are always two sides to the story.