The simplest answer is that its stock price has skyrocketed — by somewhere around 8,000 percent over six months. The more complex answer is that its stock has become the central game piece in a financial power struggle between a major hedge fund, Melvin Capital, and a group of amateur stock traders who yell on the internet.
Mike Novogratz, an investor and former hedge fund manager, said the internet activity is the result of frustration that everyday investors are often locked out of lucrative opportunities, such as initial public stock offerings.
Like many companies that are in rough shape, GameStop was the subject of what’s called short selling, in which professional investors borrow shares of stock to sell and then buy back later so they can return them, which lets them pocket the profit if the stock price goes down. They’re basically bets that the company will fail.
GameStop was one of the most shorted of all publicly traded companies. Other companies on the list include AMC Theatres, Bed Bath & Beyond and even the mostly defunct Blockbuster. Remember those names.
And then GameStop became the source of a short squeeze.
What is Short Squeeze?
In simple its Buy High Sell Low, confusing right?
The missing part is these are borrowed stocks, a Hedge Fund Investor (HFI) borrows, say, 100 stocks for $10 each and sells it. He now has $1000 in cash in the mean time he will be paying premium to the lender.
Now when the price of the stock is low say -10% of the sold value he buys back the 100 stocks for the price of $9 and returns it. Now they have made 10% profit out of nothing with pure speculation that the stock will go down.
There have been manipulation in the past using media to devalue the stocks to short sell and earn profits.
Ok but what happened now?
The internet has been used to prognosticate about stocks for decades, but there’s never been anything quite like the Reddit community called r/wallstreetbets, also known as WSB.
WSB takes something of an internet extremist’s approach to investing. Its slogan is “Like 4chan found a Bloomberg Terminal,” alluding to the fringe message board and the Bloomberg computer system that is nearly ubiquitous in finance.
Amateur investors on WSB have discussed GameStop (which they refer to by its stock ticker abbreviation, GME) for years, but things changed early this year. As the price of the shares rose, more WSB posters jumped on board. “100% of my portfolio on GME because of you idiots,” a person posted Jan. 10.
Before the short sellers could buyback to pay the lender the crazy bunch from WSB raised its value from trading at around $43 (already significantly more than it traded at at the beginning of the year) to as much as $380, becoming one of the most traded stocks on the market along the way.