What is a Short Squeeze and Why is Gamestop's Stock (GME) up 1,700% in Just a Few Weeks?
Unless you have been living under a rock, you have probably heard of all the craziness going on with Gamestop this week. During the last few weeks, many people have been asking me, what is a short squeeze? And why is Gamestop up so much in the last few weeks. So far the stock is up over 1700% without any good news surrounding the company. So what is causing this?
A bunch of Wall Street hedge fund managers were betting that the stock was going to fall to $20 a share, so they shorted Gamestop stock, also known as short selling. This means they are betting the stock will go down and profit if that happens. They borrow shares from a broker, and at some point in the future, they need to deliver those shares back. If they can borrow the shares at a high price, and then buy them back at lower price to deliver back to the broker, then the difference in price is their profit.
However, a group called Wall Street Bets on Reddit rounded up a whole lot of everyday investors like us to buy the stock and beat wall street at their own game. As the stock started to go up, the short sellers had to cover their positions to avoid further losses. To cover their short position they need to BUY the shares. This buying by the short sellers creates even more upward momentum in the stock resulting is stocks like Gamestop, AMC and Blackberry to have huge gains, like we have seen recently.
The professional traders on Wall Street have been doing this since the beginning of time, but never before have they had to compete with the "dumb money" as they call it. I think the average investors like us are finally leveling the playing field that has been dominated by the wall street traders. It will be very interesting to see how this plays out going forward.