The Gamestop Short squeeze is quickly becoming the stuff of legends. From a price of under $3 a year ago, shares in Gamestop now trade hands at over $200 a share. That is close to 100x return. If you had put in $10,000 in to Gamestop shares about a year ago, you would be sitting on a cool $1,000,000. That is truly epic considering Gamestop was dead and buried a year ago. The people at popular subreddit group /r/wallstreetbets crafted the greatest short squeeze of all time.
What Is A Short Squeeze?
When you believe a stock is going to rise in value, you are said to be “long” the stock (“bullish”). When you believe a stock is going to decline in value, you are said to be “short” the stock (“bearish”).
To put it simply, Short selling is you betting on the decline in price of a stock.
Here’s the brilliant Sahil Bloom explaining what a short squeeze is.
Imagine you read that Colombia is experiencing a very wet Summer. You believe this will lead to a huge coffee harvest, flooding the market with coffee and driving down the price. You want to profit from this. So you borrow a bag of coffee from Jimmy, your neighbour.
You sell the bag of coffee to Paul, your other neighbour, for $20, the price of the bag at your market. You now have $20 but you owe Jimmy a bag of coffee (you borrowed it, after all). One month later, the price of coffee drops 50%. You buy a bag at the local store for $10.
You walk over to Jimmy’s house, hand him the new bag of coffee, and give him $1 as interest on the borrowed bag. So you sold a borrowed bag for $20 and then bought it back and returned it for $11 ($10 plus $1 interest). You’ve made $9 profit on your coffee “short” position!
Of course, if you had been wrong and the price of coffee had risen, you still would have had to “cover” your short by buying a bag and returning it to Jimmy. You would have lost money. Because the price can rise infinitely (in theory), losses from short selling are uncapped.
And that is exactly what is happening to Gamestop shares. The big hedge funds had bet that Gamestop shares would go down due to Gamestop having an outdated business model. They thought Gamestop is going the way of blockbuster as no one shops in store for video games anymore. But the people on reddit subgroup Wallstreetbets took the opposing view and believe Gamestop have a future.
Not only that but the little guys saw hedge funds short selling more shares in Gamestop than shares outstanding. Redditors saw the overloaded short position and started buying the stock, as a “short squeeze” against melvin. Now the “borrowed” shares were due, but redditors refused to sell, demanding higher and higher prices.
Essentially the little guy is taking on the billion dollar hedge funds and they are winning. To add to the woes of the hedge funds, billionaires such as Chamath Palihapitiya and the richest man in the world Elon Musk have come out in support of the redditors. Elon for one hates short sellers as many hedge funds were ‘short’ Tesla for a number of years. Look at the Tesla share price today. Looks like Elon won then. And he might win again!
This has added further fuel to the price of Gamestop shares. With the Gamestop story taking hold on social media and media at large, more buyers are entering the fray and causing the share price to shoot up even more. This means the short sellers will have to pay higher and higher prices to cover their positions. For what its worth, the people at Wallstreetbets were looking for a $1,000 a share price! But with the way things are playing out, they are now looking for $5,000 a share! It will be interesting to see how this all plays out.
For those that want a piece of the action, either to make money, to be part of history or to stick it to the big bad hedge fund, the easiest way to buy shares in Gamestop in the UK is via the Freetrade app.
Freetrade are currently running a promotion for new users. Anyone who signs up with my link, funds their account – can be as little as £1 – and completes a W8-BEN form on the app will receive a free share worth up to £200.
I should caution that Gamestop shares are totally out of whack with underlying business fundamentals. The price in my view is only rising because of the short squeeze thesis. So be careful when investing in Gamestop shares. And only risk money you could afford to lose.