In an epic David vs Goliath battle, retail investors defeated big hedge fund Melvin Capital. GameStop stock experienced a short squeeze causing its stock to hit a high of $144. GameStop is one of the most shorted stock in the US stock market history. A short position is one where the trader borrows stock in order to sell it in the market. Typically, the number of short can only be up to the number of shares someone owns publicly that they then borrow out to these short sellers. Institutional investors have found a way around this and has shorts greater than the number of floating shares (total number of shares that the public owns).
Given that the amount of borrowed shares is more than the actual amount of shares, a rise in price causes these short to blow up. As more people buy the underlying shares and hold, the number of shares trading reduces. This reduces the amount of shares the institutional investors are able to buy in the market to return back their borrowed shares. As the price increases, so does the losses to those who borrowed and bet against the stock. In one day, a single hedge fund was estimated to have lost over $2.1 Billion Dollars.
Institutional investors, led by Citron Capital’s Andrew Left, led the charge in publicly defending their short positions in GameStop. Retail investors from wallstreetbets to youtube to tiktok was having none of it. In a concerted effort across continents, retails investors showed their confidence in GameStop and its growth story led by former Chewy founder Ryan Cohen. GameStop has everything going for it at the moment. Consoles and gaming peripherals are selling like hot cakes as most people are spending their time indoors. Ryan is expected to bring with him experience in managing an eCommerce platform and lead the charge of transforming GameStop into a modernized gaming hybrid one-stop shop owning both retail and eCommerce segments.
Its looking like this short squeeze has still not ended with GME stock having the potential to go even higher. If the stock continues to rise at its current rate, it is believed that Institutional Investors might ask the exchange and the SEC to step in to try to stem the volatility. This will set a bad precedent as it will signal to the market that the current regulators are not allowing the free market forces to take its course.
Millennials and Zoomers often focus and spend money on experience. GameStop has huge potentially in marrying their retails outlets and providing that experience to their customers. Fresh and bold ideas are what GameStop needs at the moment and they definitely do have the confidence and support of retail investors.