THE GameStop is a famous chain of stores in the USA, specializing in new and used games, which has been struggling to adapt as more people buy games online. The company’s stock has soared nearly 2,000% since the beginning of the year thanks to a dispute – supported by Elon Musk, no less – among a community of Reddit and an investment fund.
GameStop shares rise nearly 2,000%
Melvin Capital Management is a fund known for operating short positions in the stock market, or “short selling” in English. This means that they profit when the price of a stock falls, and have a loss when it goes up. It is a way of betting that companies will deliver bad financial results, for example.
Several investment funds were short on GameStop, especially Melvin. In recent weeks, members of Reddit’s r / WallStreetBets community have recommended buying shares in the company, which would encourage the price to rise, in an operation called “GameStock”.
Well, that happened: GameStop’s shares started the year trading at $ 18.84, and reached $ 65 last Friday (22). That was just the beginning.
Elon Musk, owner of Tesla and SpaceX, posted a link to the Reddit community on Twitter, indirectly praising the action against short sellers. GameStop shares soared to a high of $ 380 on Wednesday; this is a difference of 1,917% compared to the beginning of the year.
For years, Musk has criticized investors who hold short positions in Tesla shares. One of the Facebook twins, Tyler Winklevoss, also expressed support on Twitter: “GameStock’s army is winning the war”.
What is short squeeze?
Betting against a company on the stock exchange is a little more complicated than it looks, since you cannot have a negative number of shares. Instead, you need to follow two steps:
- the investor borrows the stock by making a contract with another person, company or fund, defining terms such as return period and interest payable;
- the investor sells, on the open market, the stock he borrowed.
The disassembly of this strategy follows the opposite path, that is:
- the investor repurchases, in the open market, the share in which the short selling was made;
- the investor returns this action to the entity that made the loan agreement.
The problem is that if a stock starts to rise fast, the investment fund may be desperate to undo the short position – which involves buying the stock, causing its price to rise further. This is known as “short squeeze”.
Fund loses 30% since the beginning of the year
This is what happened with Melvin Capital Management. She started the year managing $ 12.5 billion in assets, but according to the Wall Street Journal, its profitability was -30% until last Friday. Two companies, Citadel LLC and Point72 Asset Management, injected $ 2.75 billion to contain the damage.
This was partly due to the rise in GameStop shares; O WSJ says other stocks have also given headaches to the fund, not to mention which ones. We know that the Reddit community has been encouraging the rise of other companies that are also the target of short selling. This includes BlackBerry (233%); the network of cinemas AMC (544%), affected by the pandemic; and household goods retailer Bed Bath & Beyond (163%). The percentages refer to the price at which each year started in 2021.
How long will it last? For analyst Michael Pachter, of Wedbush Securities, GameStop’s shares should return to their previous levels when the company discloses its financial result in March – that’s when board executives and investors will be able to sell their shares.
Pachter tells the CNET that this is “a pyramid scheme”, because it depends on more investors betting on the same stock to make its price go up; “There is a point where it will fall”. Until then, some Reddit users are very happy, already planning what they are going to do with the earnings.