Updated: Mar 16, 2021
GameStop, a struggling video game retailer has been hit hard by the pandemic. Though the past few months 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 sell on the internet..
· Short selling: when an investor sells borrowed shares of stock with the hope of buying the shares back later at a lower price. It is the opposite of traditional investing aimed at profiting from a stock's rise.The GameStop story starts with short sellers who lost confidence in the company's future as the pandemic challenged companies without strong digital strategies.
With short selling, investors make money if the price of a company's stock falls. If the price rises, investors need to cover their positions by buying the stock back at a higher price. The losses can be substantial. Like many companies that are in rough shape, GameStop was the subject of “short selling”, which lets them pocket the profit if the stock price goes down. They're basically bets that the company will fail.
Individual investors, buoyed by comments in the r/WallStreetBets Reddit community, began driving up the price of GameStop on Jan. 11, when changes to the company's board of directors suggested it might be embracing a digital strategy.
· The rising share price put pressure on short sellers and their bets for declines in GameStop shares. Soon, they were forced to become buyers of shares they had sold short, pushing share prices even higher.
· A stock market freeze followed. Market freeze or frozen market means that all trading has stopped in the market or an account due to an external factor like a technical malfunction or misconduct on the part of an individual. In the case of GameStop, trading apps like Robinhood and TD Ameritrade have restricted trading of certain securities to closing, or canceling an existing position.
BTC vs. GME stock (orange) performance. Source: Tradingview