The GameStop stock saga has been ongoing for most of last week and came to a head on Friday after prices surged following a steep drop.
Last week has been a proverbial rollercoaster concerning the stock market thanks to two unlikely sources: GameStop and Reddit. It all started when the subreddit r/wallstreetbets discovered that hedge funds were short squeezing GameStop (GME) stocks. So they decided to buy the stocks up instead, which made prices skyrocket and eventually cost investors billions.
Prices kept surging and on Thursday went up by over 40 percent and reached a fever pitch of over $400 per share. Then Robinhood, one of the most popular online and fee-free stock trading sites, restricted trading in GameStop and other hot stocks such as AMC (AMC), BlackBerry (BB), Bed Bath & Beyond (BBBY), and Nokia (NOK) that same day. According to an official statement: “We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only.”
The policy change caused the stock to drop more than 44 percent. However, after significant backlash Robinhood rescinded and allowed for restricted trading on Friday. Despite its volatility, the stock has overall gone up nearly 950% from just under $20 at the end of 2020 to the current price of about $195 by Friday.
The phenomenon that started this crazy chain of events is called a short squeeze. Basically an investor or short seller who thinks a stock will fall borrows the shares and sells them, with the hopes of buying them back at a lower price and pocketing the difference before paying back the loan. The drawback is that a short seller can be hurt if the stock they borrowed keeps increasing in price. Technically these losses are infinite, which creates another buying spree as short sellers rush to buy back the stock before it moves even higher. This is exactly what redditors did to hedge funders when they bought up the stock, costing them those aforementioned billions.
Between plans to reboot their stores, laying off at least 50 employees and the company’s CFO of nine years resigning, GameStop has had a rough several years. And the pandemic hasn’t been kind to the retail chain either. Gamestop closed over 300 stores, including all locations in the state of Massachusetts in 2020, and in spite of decent holiday sales the chain is still losing money.