Do you really know? What is the Gamestop short squeeze?
What is the Gamestop short squeeze? Thanks for asking!
You may have seen headlines about it in recent weeks, and it’s certainly one of the financial stories of the year so far. The Gamestop short squeeze saw Wall Street tremble at least temporarily due to the actions of amateur traders from Reddit. And this battle is perhaps just the start of a long war.
To understand the short squeeze, let’s go back to the beginning. Gamestop is an American chain of video game stores which has a presence in many countries across the world. It’s well-known among gamers, but has been struggling of late due to competition from digital distribution.
That might sound like sad news, but some American hedge funds saw an opportunity to make money by effectively betting on the company’s stock falling in value. That’s known as shorting and it’s seen as a form of vulture capitalism, because of the disregard it shows for the businesses in question.
How does short-selling actually work in practice?
OK it’s a little complicated for novice traders but let’s try with a simplified example. Say you expect the value of a company’s shares to drop. You borrow a single share in the company from someone and then immediately sell it.
When the value drops, you can make a profit by buying back a new share at a lower price, and simply paying it back to the original lender. This is what some hedge funds like Melvin Capital did with Gamestop, but in far higher quantities than a single share of course!
So what went wrong for the hedge funds in this case? Anybody can buy stocks? In under 3 minutes, we answer your questions!
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