What's Going On with GameStop?

The recent events with GameStop have created a lot of confusion and excitement, and I was curious to see what people knew about what happened. I spoke to sophomore Ruchi Agarwal to see what she thought, and she said, “I know that there was a big jump in the price of the stock, and someone was short-selling GameStop, and now Wall Street has lost a lot of money”. But terms like short-selling and the actual events that took place can be confusing, and this story is a simple version of what you need to know to understand the GameStop short-squeeze.

On January 11, one share of GameStop traded for under 20 dollars. Just over two weeks later, the stock topped out at 492 dollars a share, the highest the stock has traded for since the company went public in 2002. So what happened? How did the stock price of a declining company suddenly skyrocket?

GameStop is a company that specializes in selling and buying things related to video games. It has slowly been becoming obsolete, as people can now order video games, consoles, and other accessories from the comfort of their homes, eliminating the need for a visit to one of their stores. The stock price can be seen steadily declining in the graph above, and, at its lowest, it traded for around $2.80 a share in April 2020. But in the past few weeks the stock has experienced a major jump in price, which, to the surprise of many, was attributed to a group of investors who planned to drive the stock up on Reddit.

These investors recognized that the company was being targeted by short sellers, or “investors who bet against a company and are rewarded when its stock falls” according to the Washington Post. These short sellers will borrow shares, sell them, and then, betting that the stock will fall, buy them back at a lower price to return them to whoever loaned the stock to them. They make profits off that stock falling. So, rather than letting the stock fall, the redditors planned what is known as a short squeeze, where a group of investors purchase lots of shares in the hope that the short sellers buy the stock back at a higher price to minimize their losses as described in the article above. Their plan worked.

The short sellers were forced to cover their losses and buy the stock back at the higher price, which drove the price up even more, causing this dying stock to shoot up. The result was great for some and terrible for others. Besides the group on Reddit, others profited nicely, including two hedge-fund managers who made $700 million from the stock (a story was run on them in the Wall Street Journal). But they were certainly among the minority of Wall Street investors, who have been estimated to lose a whopping $19 billion according to Markets Insider. In the coming weeks, investors may attempt more short squeezes, as this example with GameStop has driven up interest in the tactic.