![]() AMC Entertainment Holdings (AMC) saw its stock rise from less than $5.00 a share to $20.30 in one day, a 300% increase. During the week of January 25, the per share price of several other companies witnessed dramatic volatility as a result of the group’s efforts. Investors in GameStop are not the only ones benefiting from r/WallStreetBets’ attack on Wall Street short sellers who targeted companies that have struggled in the pandemic. For example, as of January 29, 2021, an individual who uses the pseudonym “Roaring Kitty” in the r/WallStreetBets Reddit community bragged that they had turned a $53,566.04 investment in GameStop stock into $48 million. Using this strategy, as of January 28, the community of r/WallStreetBets had driven up the price of GME, resulting in a loss of $1.6 billion for short sellers – and significant unrealized gains for holders of GameStop stock. ![]() But, large orders to purchase stock drives the prices up even more, resulting in a continuous loop of rising stock prices. As discussed earlier, the short sellers are forced to purchase the stock, despite the rising prices, in order to cover their position and minimize the losses resulting from their bet that the stock price would fall. Short sellers soon found themselves caught in what is known among Wall Street investors as a “short squeeze.”Ī short squeeze is a term used to describe a feedback loop that continuously drives up the prices of the stock. Subscribers of the group encouraged each other to purchase as many shares of GME as possible to artificially inflate the price of GameStop stock and saddle the short sellers with enormous losses. In an effort to take advantage of Wall Street short sellers, the r/WallStreetBets community engaged in an effort to drive up the price of the stock. Short sellers likened GameStop to Blockbuster Video just prior to the advent of Netflix’s streaming service. The company is a brick and mortar seller of videogames in a time when many videogame players have pivoted to streaming video games. As much as 140% of the outstanding shares of GME had been shorted. In the case of GameStop, predominantly individual (or non-institutional) investors who subscribed to the Reddit community r/WallStreetBets recognized that hedge funds had taken an extremely aggressive short position on GameStop and several other stocks. Buying a stock with the intention of short selling is described as having a “short position.” Short selling can be a very high-risk arbitrage theoretically, the price of the security can rise to infinity and the short seller will not only be forced to purchase the stock at the higher price but will have to pay the owner of the stock interest. When the short seller purchases the stock at the lower price, they can return the stock to the initial owner, locking in the proceeds for themselves. The short seller sells the stock at the current price with the expectation that the price of the stock will fall, and the short seller will ultimately be able to purchase the stock at a lower price. The Basics: Short Sale, Short Squeeze, and Reddit’s InfluenceĪ short sale of an equity occurs when an investor (short seller) borrows a number of shares of a stock for a fee and/or at an interest rate – and often on margin (on loan) – from another investor who already owns shares of stock in the company. First off, what just happened? Was it legal? And what lessons does it hold for companies that are later swept up in a similar frenzy? A Reddit community forum named “Wall Street Bets” (r/WallStreetBets) used the power of its more than 2.9 million subscribers to wage war on Wall Street hedge fund short sellers. The reason behind the meteoric increase has now become very well documented. ![]() Investors who bought on January 12 and sold on January 27 enjoyed almost 1,800% in appreciation. Only 15 days later, GME closed at a price of $347.51 on a volume of 93.45 million trades. (ticker symbol: GME) closed at a price of $19.95/share on a volume of approximately 7 million trades. ![]()
0 Comments
Leave a Reply. |