Wondering what happened with GameStop and confused about what a short squeeze is? The complexity of this kind of trading is far from the simple strategy of buy and hold investing. Even for those who have no plans to jump on bandwagon, it’s good to understand exactly what is going on. We can learn what’s happening, how it works, and move intelligently forward. In an effort to understand systems, Brad has been having a maddening healthcare experience. He needs a CT scan but hasn’t been able to find out what the base cost will be. The negotiated cost won’t be known until after the procedure so Brad won’t know how much it will cost him until then. At a macro level, the stock market has had a fairly smooth move up and to the right for the past 10 years or so. For investors, it’s been somewhat predictable, at least until this last week when GameStop stock began to skyrocket. There are aspects of the stock market the average investor doesn’t see. Hedge funds are participating with huge amounts of money in layers that are essentially hidden to the masses, until it wasn’t, and they got caught unaware. Brian Feroldi says the last few weeks have been some of the weirdest in the investing world that he’s ever seen. The story has infiltrated mainstream culture and he’s been getting questions from all over about what is going on. Even his mom sent a text asking about GameStop. First, GameStop is a physical seller of video games. As video games became popular, GameStop was a great investment, however, once people began downloading video games, its business prospects declined. As a result, GameStop stock prices have also been declining for many years and it is believed they will cease to exist as a business in a couple of years. Investors or many managers can make money when a stock declines in what’s called shorting the stock. A short sale stock is the opposite of becoming a buy and hold investor in a stock. A short sale works by going to your broker predicting a stock’s decline and state you want to short that stock at a particular price. The broker goes and borrows shares of the stock from another investor for the price you stated and you collect the proceeds from the sale. Your goal is to then buy those shares back at a later date for a lower price and return them to the original investor. The original owner of the stock makes money by receiving a small fee from the person borrowing their stock, almost like being charged an interest rate. The more demand there is to short a stock, the higher the fees. There is no set timeframe when shorting a stock. I can be shorted indefinitely. However, if the owner of the stock wants to sell it, the broker who borrowed the stock would have to go and find another short for you to borrow from. If they cannot find other shares to short, the transaction would need to be undone on the short side at current market rates. Most of us take long positions on stocks, believing the stock is going to increase in value. Allowing someone else to borrow your stock in a short position is another way to make money on owning it. Some brokers like Brian’s are interactive and sent him an email asking if he would be interested in allowing his stock to be borrowed or shorted. since he’s interested in holding the stocks for a long period of time, he said yes. Shorting a stock does put downward pressure on the share price. Individual investors don’t have much influence, but a hedge fund taking a significant position to short a stock can drive prices down. The market price of a stock at any given time is simultaneously the lowest price buyers are willing to pay and the highest price sellers are willing to sell at. Shorts are happening all of the time, so how did GameStop land on the radar of the subreddit group, Wallstreetbets? In the case of GameStop, there were more shares sold short than there were publicly traded, which is something that very rarely happens. Wallstreetbets took the opposite position, stating that GameStop’s fundamentals were different from companies like Blockbuster, and its stock price was actually undervalued. An article by Andrew Left from Citron Research predicting GameStop stock going down hard caught the attention of Wallstreetbets. Its members rallied together to buy GameStop stock. It was then that GameStop stock began to rise. Someone with a short position on a stock does not want to see the price rise. Rising GameStop prices kicked off what’s called a short squeeze. There’s no logical argument for saying that GameStop stock was worth $4 in December and $400 just three weeks later. What shifted was who was controlling the mechanics of the system. The members of Wallstreetbets understood that due to the large number of short positions on GameStop, if enough of them got together to buy it, they could force those in short positions to buy back into it. GameStop was priced for bankruptcy. While there’s no limit to how high a stock can go, the lowest it can go is $0. In that…
293 | Gamestop Squeezed to the Max | Brian Feroldi – ChooseFI
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