Short Squeeze In GameStop Explained: 7 Things Black America Needs To Know

Short Squeeze In GameStop Explained: 7 Things Black America Needs To Know

Short Squeeze In GameStop Explained: 5 Things Black America Needs To Know (AP Photo/Jeff Roberson)

GameStop is trending, its stocks have surged and the trading app Robinhood and other investment brokers have restricted purchases of this and other short stocks. 

GameStop is a mall-based retailer that sells games, consoles, and other electronics. Based in Grapevine, a suburb of Dallas, Texas, the company operates 5,509 retail stores throughout the U.S., Canada, Australia, New Zealand, and Europe.

As people are stuck at home due to covid restrictions, they’ve been buying more games online and less in malls. Digital content distribution is booming and online retailers have been beating out mall-based businesses, Decrypt reported. GameStop’s business declined.

Several institutional traders started short-selling GameStop stocks with huge leveraged positions. The stock went from about $45 a share to less than $5 in 2020. Then people on the Reddit board r/WallStreetBets decided to take on some of the brokers who opened shorts. The GameStop price skyrocketed.

The company got a boost when Tesla billionaire Elon Musk tweeted a single word about the company, “Gamestonk” — a reference to GameStop and to “stonk,” internet slang for stock — and sent GameStop’s price soaring, BBC reported.

GameStop stock more than quadrupled in January alone. On Jan. 25, it opened about 50 percent higher than its Friday, Jan. 22, closing price and briefly rose by more than 115 percent before retreating at close, up by “only” 18 percent.

This level of volatility is highly unusual. The recent price action in GameStop and several other stocks can be attributed to a phenomenon known as a short squeeze. 

A short squeeze happens when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses, according to Investopedia.

Short squeeze in GameStop explained: seven things Black America needs to know:

1. Robinhood not playing fair with GameStop stock

Some investors were irate when Robinhood abruptly decided to halt the buying of GameStop this week.

Hip-hop artist Ja Rule was one of the many who denounced Robinhood and accused it of criminal behavior for temporarily halting users from acquiring Gamestop stock as its value surged this week, Fox News reported.

“Yo this is a f–king CRIME what @RobinhoodApp is doing DO NOT SELL!!! HOLD THE LINE…WTF,” the “Put It on Me” rapper tweeted Jan. 28.

In a separate tweet he continued: “They hedge fund guy shorted these stocks now we can’t buy them ppl start selling out of fear… we lose money they make money on the short… THIS IS A F–KING CRIME!!!”

He then blasted Wall Street for derailing “the American dream.”

Another user tweeted, “Robinhood has disabled trading in $AMC$GME$NOK etc, proving that the ‘little guy’ was never allowed to win in a “free market.” What a joke.”

Many users accused the system of being rigged for the rich. “This Robinhood situation shows just how much rich people hate poor people. You try to pull yourself up by those invisible bootstraps if you want to and they’ll be right there to cut em’,” a tweet read.

A user replied, “The gaslighting for me is what pisses me off most. The working class finally finds a way to climb the economic ladder and somehow ‘they’ destroy access to it, and it’s back to the same “the poor is lazy/uneducated “ narrative.”

Robinhood, which on Thursday prevented customers from buying more shares of GameStop and other companies, said it would allow “limited buys” starting Friday. This sent heavily shorted stocks soaring “as an army of social-media rallying retail investors sought to take on established Wall Street firms,” MarketWatch reported.

2. The Reddit factor 

When GameStop was trading at about $40 a share, Wall Street analysts commented that the stock was worth a lot less than that. Rather than fall in price, GameStop shares surged, NPR reported. And then fell back. Then surged again. The GameStop 52-week high stock price is $483.00, according to MacroTrends.

“It became clear quite quickly that much of the activity was driven by day traders, many of whom had clubbed together on Reddit and other platforms, to drive the stock up,” NPR reported. “By pumping up the price of GameStop shares, the day traders trapped the short sellers in something called a short squeeze, which had the double effect of bruising the short-sellers, while driving the stock price through the roof.”

3. Desperate buys

Short squeezes are typically seen in stocks that have a slew of short-sellers betting against them. By looking up a stock’s short interest, you can figure out which companies are short squeezes.

Short interest indicates the quantity of shares sold short as a percentage of the stock’s float, or the number of shares that are actually available to trade. So if a company has a float of 10 million shares and 2 million shares are currently sold short, it would have a short interest of 20 percent, The Motley Fool reported.

Hedge funds and other investors most often scramble to cover short positions when stocks soar high. 

“Let’s say that you short 100 shares of a stock at $20 a share, meaning that the maximum you can profit is $2,000 if the stock goes to zero. If the stock goes to $40, you’ve lost $2,000, or 100 percent of what you hoped to make. If it goes to $60, you’ve lost 200 percent,” The Motley Fool reported. Because of this, the markets are seeing desperate buying in GameStop and other heavily shorted stocks that are spiking higher.

4. Short-selling controversy

GameStop recently had short interest that exceeded 100 percent of its available shares. “In this latest short-selling controversy, many investors have been confused by the sheer level of exposure that short-sellers have to certain stocks,” The Motley Fool reported.

There’s a catch. The investor who loans you the shares has the right to take them back at any time with little notice. 

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5. Invest or not to invest in GameStop?

So should you immediately invest $1,000 in GameStop Corp?

Most experts say not now. Motley Fool suggests investors skip GameStop and opt for other value stock.

And investing research firm Zacks had this to say, “Valuation metrics show that GameStop Corp. may be overvalued. Its Value Score of F indicates it would be a bad pick for value investors.”

6. Power to the player?

The surge in GameStop stocks could have provided a huge avenue for individual investors to make a windfall. 

“By pulling GameStop’s stock into the stratosphere, individual investors pulled down big Wall Street players who never imagined that retail investors could pull off a short squeeze,” The New York Daily News reported.

It was such a major opportunity that the GameStop situation is now being monitored” by Federal regulators and state regulators said they will review the role of online trading apps such as Robinhood. Wall Street wants dramatic reform.

Despite the investing opportunity GameStop initially afforded, the trading halt hurt the “little guy.” It’s the small investors who suffered.

“Having riches isn’t the issue, it’s how you’ve obtained them and your part in keeping others from obtaining said riches for themselves,” noted one person on Twitter.

Another speculated that the call to halt trading GameStop came from authorities — something Robinhood has denied.

“The SEC is probably forcing Robinhood to do that I will bet you anything The SEC is probably telling them to stop trading or we will shut you down I don’t think Robinhood would do that on their own and destroy their company,” the tweet read.


7. A ‘bottom-up revolution’?

Although Reddit founder Alezis Ohanian called the GameStop movement a “bottom-up revolution,” many on Twitter said the average person was shut out of making money from the stock. 

One person tweeted, “It was designed in a way where the welfare for the rich came off the backs of the struggling middle class paying taxes for these parasites. And people are just okay with it.”

Others agreed, tweeting, “That’s right and nobody should be ok with any of this.”

“Exactly. They need the poor to remain poor. If not the system topples,” noted another tweeter.

The retail investor-driven trading frenzy in GameStop was a “seminal moment” for the finance industry — a frenzy started in large part on Reddit, Ohanian said, according to CNBC.

“We’ve watched the Internet now, over the last 10, 15 years thanks to the rise of social media and all this infrastructure, bring a bottom-up revolution to so many industries,” Ohanian said in a “Squawk Box” interview. “We’ve seen this across media, we’ve seen this across so many sectors, and now it’s happening to finance.”

But for those who missed out, it was anything but a “bottom-up revolution.”