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What is GameStop Short Squeeze? Why it's share price going up? - Explained

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American StockMarket is on fire! Why?

Though the Dow Jones index fell sharply by over 2 %, shares of GameStop Corp jumped by over 130 per cent to close at $345, taking its market cap to $24 billion.

GameStop Corp. Stock Short Squeeze

Now, GameStop Corp. Stock Squeeze is nothing short of a national sensation, reaching the doorsteps of both new President Joe Biden's administration and Federal Reserve Chairman Jerome Powell.

Now we are going to talk about an interesting topic that not only the US Government but President Joe Biden also concerned. 

Apart from retail investors and US Hedge funds, Elon Musk and Chamath are also involved in this story.

In fact, some Indian investors are also concerned about this issue.

And all this story is about GameStop Corporation :

On January 4th, the share price of GameStop was 17.25 USD and now it is $347.

Yes, the share price is increasing but not because of the company's performance or because of any announcements that would affect its share price.

In simple terms, the company has nothing to do with this hike in its share price.

While retail investors gained some lakh crores from this incident, hedge funds lost more than 10,000 Crores, on the other hand, the short-sellers in the stock were forced to go for a ‘short squeeze’, leading to the tremendous hike in share prices.

Let's go deep into it to know what happened and why all incredibly prominent financial institutions and people are concerned over this issue.

US-based Hedge Fund, Melvin Capital did a massive short on GameStop stock and some investors came to know about this and a Reddit user named DFV has revealed that some hedge funds did heavy short selling that leads to a negative float position.

And now the question is What Short selling is and What Negative float position is?

Short Selling: 

Short selling means, First you sell the shares and then you buy those shares to close the position, the difference in the price you borrowed and the price you bought when you close is the margin that you make or lose as a short seller.

For Example: If an investor thinks that the price of ABC Shares is going to fall, the investor may borrow 10 Shares of ABC from their broker and then sells it for the current market price of Rs.500. If the price falls to Rs400, the investor could buy those share back to close the position. And the difference between these prices is the net profit i.e; 5000-4000 = Rs.1000. However, if the price of ABC Share increases to Rs600, then the investor would lose Rs. 1000 (5000-6000).

And in this GameStop case, Some hedge funds felt that the company was not performing well and the price of those shares was going to fall soon.

And that's why they short sell those shares.

Negative Float Position:

It means Short sellers sold the number of shares that are now not available in the market, to trade. Because some shares of GameStop are with institutional investors who invested in the long term while some are with the promoters who have no intention to sell in the short term.

Hence, the no. of shares borrowed by the short sellers are not available in the market to buy.

So, the problem is, to close the short-selling position, one needs to buy the shares. And when short sellers went to buy the shares they came to know that there was no one ready to sell the shares.

Because here in Reddit there is some other plan going on, On Reddit, DFV and a bunch of Redditors on a subreddit known as r/wallstreetbets planned to buy the shares and not to sell. 

So there is a gap created between supply and demand. I.e; now there are so many hedge funds to buy the GameStop’s shares but no one is ready to sell and because of this the price increases.

The share price is increasing from 

$17 ---> $30 ---> $40---> $60---> $150 ----> and now running on $347 

In the US some retail investors hate hedge funds because they short sell shares and put pressure for their own benefits that lead to fall in price due to which retail investors get losses and now they have taken revenge on Hedge funds. 

Elon Musk’s Tweet on GameStop Stock:

Elon Musk also tweeted on this by mentioning the Reddit group that and after this some investors bought these shares and put them on hold.

Adding to the momentum to this the Tesla CEO tweeted “Gamestonk!!”

https://twitter.com/elonmusk/status/1354174279894642703

that led to GameStop’s share price up more than 60%. 

It seems Elon Musks also took revenge through his tweet, as some time before Melvin Hedge Fund short sold Elon Musk’s shares that led to a fall in the share price.

Chamath palihapitiya Tweet on GameStop Stock:

Facebook’s Former senior executive and social capital Founder Chamath also tweeted, “Tell me what to buy tomorrow and if you convince me I’ll throw a few 100 k’s at it to start,” and people replied with GameStop corp and in response, he again tweeted, “Lots of GME talk so. We bought Feb $115 calls on GME this morning,” and after that, some investors also bought the shares and put them on hold.

https://twitter.com/chamath/status/1354089928313823232

After that, there is an increase in this rally that short sellers are unable to close their position. Recently, Melvin closed its position but with a huge loss of more than 10,000Crores.

Short squeeze

It is a term used IN THE FIELD OF STOCK MARKETS by market participants referring to a phenomenon where short-sellers who have placed their bets on a stock’s fall, run to buy the stock in the episode of a hostile price movement, in order to cover their losses.

This increases the demand for the share that led to a huge rally in share prices.

Michael Burry, Big Short Investor, Known for Shorting the 2007 mortgage bond market by swapping Collateralized Debt Obligations (CDOs), also made a 1,500% gain on GameStop during its Reddit-fueled rally.

He had Rs. 120 Crore and now his value is Rs. 1900 Crore.

Conclusion 

GameStop Stock Squeeze is an example Of Why Buffett Stopped Short Selling. Take a look at the statement of Warren Buffet on Short Selling.

Most investors will see way more stocks that are dramatically overvalued than stocks that are "dramatically undervalued," during their careers; it is a "very tough business because of the fact that you face unlimited losses."

       -Warren Buffett, on short-selling

So many traders felt that short selling is an irritative move that is never worth taking. 

But in the end, one has to become a winner while the other loses something in a great deal.

 

If you liked reading about this article, do share it with your friends and family so that they can also learn about the GameStop crisis.

 

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author

Navitha