So What’s Happening With GameStop and the Stock Market?
Here is my take on stock market history as a 16-year-old who has learned more about the stock market in the last six months than ever before.
This past Wednesday, on January 27th, news spread about a video game retailer called GameStop and investors in Wall Street whose short-selling backfired.
How did this happen?
The simple answer is that stock prices for GameStop rose considerably. Usually, this is a great thing, but GameStop has not been doing well in the stock market in the past few months. Many hedge fund investors who invest with borrowed money will short sell. Short selling is a way to trade in the financial markets. An investor will borrow some shares in a company, sell the stocks in the market while hoping the price will fall, and then repurchase the same stocks at a lower cost. Their profits are what remains after finding the difference between the price they sold their stock and the price they repurchased it. Numerous investors were essentially betting that a company would fail, and it is what they believed would happen to GameStop.
However, the Reddit community changed things drastically.
With members of the Wall Street Bets (WSB) and people from other platforms buying up the shares in GameStop, the stock prices went up and not down. What this means is the short-selling that large hedge fund investors had done on Wall Street backfired. During the last month, short-sellers lost at least 19 billion dollars. This wild situation is a short squeeze where the stock price of a company like GameStop jumped very high and very quickly. It forced traders who had bet that prices would fall to scramble to reclaim their stocks and prevent any more significant losses.
To give some perspective, about two weeks ago, GameStop cost around 40 dollars a share, but this past week, it reached a high of more than 400 dollars. The incentive behind the sudden surge from Reddit members to buy shares from struggling companies was mostly to hurt Wall Street and short-sellers, which they most certainly did. The events of this week show how risky short selling is and how unpredictable the stock market is. In the next few weeks, it will be interesting to see the aftermath of this historical economic bubble fueled by social media.