In five days, Gamestop’s stock increased from approximately 40 dollars to 350, sending news networks as well as experienced investors into a frenzy. Organized by members of the r/WallStreetBets subreddit, a short squeeze was forced on Gamestop’s stock, causing many short-sellers to lose large amounts of money.
To understand what a short squeeze is, one first needs to understand the process of short-selling. Essentially, short selling is when an investor borrows shares of a company’s stock, then sells those shares into the market. When the company’s share price eventually depreciates, the investor then buys shares from the market, which he then returns to the brokerage from which he borrowed shares, and retains the remaining profit.
Members of r/WallStreetBets noticed that Gamestop was heavily shorted—meaning that many people were short-selling their shares—and decided to force a short squeeze on the stock.
Redditors used their platform to orchestrate a massive momentary increase in share price by rapidly buying shares of the company. When short-sellers initially saw the stock price rising so quickly, they may have decided to buy shares early and cut their losses, which inadvertently contributed to the short squeeze.
Many Wall Street investors were understandably outraged by the Redditors due to the exorbitant amounts of money that were lost. One might find this hypocritical, however, considering they were profiting from essentially betting on a company’s downfall.
The Redditors now appear to have their eyes set on an assortment of other heavily shorted companies, including but not limited to Nokia and AMC. Stock trading platforms such as Robinhood are restricting trading in an effort to combat these short squeezes, but only time will dictate whether or not the Redditors will be capable of recreating this stunt.
