This week has been one for the record books – and it’s only Tuesday!
So the super concise version of what’s happened. The phenomenon is called a Short Squeeze.
To understand we a Short is a trading strategy used most often by Institutional Traders like hedgefunds to make money while betting that a stock’s price will go down. The Trader borrows stock and sells it with the promise to buy it back at a later date. Because the bet is that the price will drop, they will buy it for cheaper and netting a profit.
Well, the Squeeze happens when the price of the stock encounters a jump in price forcing the Short position holders to buy the stock at a loss so they don’t lose more if the stock continues to rise. The act of buying at a massive scale increases the price even more snowballing other short positions to close out.
There’s more to the GME story as it has become a bit of a David (retail investors) v Goliath (institutional investors) tale where David is actually none other than the sub-reddit r/wallstreetbets.
Now, wallstreetbets is self proclaimed at the time of this post “Like 4chan found a Bloomberg Terminal”, with members called “Degenerates”.
So in solidarity, the retail investors are holding and buying more GME stock as they believe the company will turn around.
Meanwhile, hedgefunds continue to underestimate the power of the retail investor and are stuck in their old ways. They repeatedly double down on their shorts and keep losing money.
As of right now, shortsellers in 2021 have already lost $5 Billion. Yes that’s Billions, with a B.
Lesson here? Don’t underestimate power of the Retail Investors… or Reddit.