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GameStop's Historical Squeeze – Explained

A quick explanation of the terms you need to know in order to understand the unprecedented event.
GameStop's Historical Squeeze – Explained

**This article is extracted from from our Instagram publication from January 29, 2021, hence this article's publication date might appear incoherent with its content.

GameStop's squeeze is, according to many, the largest demonstration of democratization of the U.S. stock market in history, where millions of amateur traders were able to squeeze billions of capital out of institutional hedge funds and into the pockets of retail investors.

According to the 2019 Preqin Global Hedge Fund Report: There is an estimated $3 610 000 000 000 worth of assets under management (AUM) by hedge funds globally. According to Investopedia, $GME was the 12th biggest U.S. equity short in January of 2021, with a short interest of around US$5.51B, up from US$276M a year ago.

Here is a quick explanation of the terms you need to know in order to understand the unprecedented event.

What is a hedge fund?

A limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.

What is short selling?

Short selling occurs when an investor borrows a stock and sells it on the open market, agreeing to buy it back later for less money.
Short sellers bet on, and profit from, a drop in a stock's price.

What are retail investors?

Retail investors are non-professional individual investors who generally invest smaller amounts than larger, institutional investors.

What is Robinhood, E-Trade, etc?

Financial services companies operating as regulated online broker-dealers, providing retail investors a platform to trade stocks individually.

What is a "short squeeze"?

A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses.
Short-sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall. If they're right, they return the shares and pocket the difference between the price when they initiated the short and the actual sale price. If they're wrong, they're forced to buy at a higher price and pay the difference between the price they set and its sale price.

Why GameStop?

About 72 million shares - or 140% of GameStop's available shares were shorted as of Friday, Jan 22. More shares were being lent out than actually existed. Hedge funds confidently believed GameStop's stock will continuously decline, generating profit for funds.

r/WallStreetBets

Subreddit (community) of amateur traders discussing stock-related topics with over 5M members as of Jan 28. Short interest in companies like GameStop is publicly available, and users saw that hedge funds were strongly betting against it.

The Squeeze

The subreddit's members and other retail investors gathered momentum and decided to suddenly buy as many shares as possible to boost the share price, causing GameStop's unprecedented climb in valuation from US$1.3B to over US$23B, with hedge funds being forced to buy back the hyper inflated stock.

Current Standings

GameStop short sellers have lost over US$5 000 000 000, with the biggest victim being Melvin Capital, who lost nearly 30% of its US$12.5B in assets under management. One reddit user allegedly made a return of around US$50M from the squeeze.

Gamestonk!! - Elon Musk
Public Reactions

The squeeze has prompted hedge fund bosses to celebrities, Elon Musk to politicians, TikTokers to meme accounts to speak about the situation from various perspectives.

According to Reuters, financial analysts at J.P. Morgan said in a note that "the unfortunate events in GameStop this week may be building a dangerous precedent for markets whereby retail investors act en masse to leverage their buying powers to spark fragility events."

A user on Reddit said: "This is for making us work on Thanksgiving night all the way through Black Friday at 9.50 an hour." While another called upon European retail investors with a list of platforms to trade $GME, saying that "today is the day. It's a zero sum game between us and Melvin. [...] Power to the players."

Tech investor and CEO of Social Capital Chamath Palihapitiya cheered on the retail investors and bought over US$100 000 worth of $GME after tweeting "tell me what to buy tomorrow and if you convince me I'll throw a few 100k's at it to start. Ride or die."

"We move on. Nothing has changed with GameStop except the stock price," said Andrew Left, an outspoken short seller of $GME who runs Citron Research.

Elon Musk tweeted a link of r/WallStreetBets following the caption "Gamestonk!!", accelerating the rise in GameStop's share price.

Alexandria Ocasio-Cortez tweeted: "Gotta admit it's really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino."

White House Press Secretary Jen Psaki stated that Treasury Secretary Janet Yellen is "monitoring the situation."

One reddit user apparently paid off US$23 504 of student loans from gains of the GameStop squeeze.

Credits

This article is extracted from from our Instagram publication from January 29, 2021, hence this article's publication date might appear incoherent with its content.

All definitions are extracts from Investopedia.

"Why GameStop?" and "Current Standings" from Bloomberg.

Cover Photo by Sergio Martinez

Article header photo by Michael Fortsch

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