The Only Free Cheese Is In A Mousetrap
In other words, do your due diligence.
This is a story where everything in the investment world flipped upside down: with Robinhood coming out as ‘not so much of a good guy,’ your everyday retail investor being accused of market manipulation, huge hedge fund crying for mercy as its losses multiplied, and the brick-and-mortar entity, which many thought was doomed for bankruptcy, seeing its share prices skyrocket to unbelievable highs.
At first glance, none of this seems to make sense, as if out of the blue someone came into your world and said: "it’s not flat, it’s round.” But that’s exactly it - the world IS round (until someone proves otherwise) and it’s about time we straightened out the facts.
Setting the Story
2021 started off with an unprecedented short squeeze of the GameStop stock which rose to over US $480 per share on its peak day of January 28. For my ‘kindred spirits’ who might not be as savvy in the investment lingo and affairs au courant, I’ll do some decomposing to make a little more sense of everything (watch out for the 👉 sign).
Many of you may have heard of GameStop, maybe you’ve bought video games from them or just peaked in the store while strolling through your local mall. If you’ve been to EB Games in Canada, Micromania-Zing in France, or ThinkGeek in the US – you’ve been to GameStop (the parent company).
However, unless you are an active investor or a curious know-it-all, you’re likely not aware of the company’s financials and might be scratching your head at why everyone awed in surprise when its stock hiked up in January.
This American brick and mortar games company was originally founded as Baggage’s in 1984 and took on its current name in 1999. However, since the mid-2010s it has been seeing a decline as a result of games sales transitioning to online platforms and a number of unsuccessful investments.
Considering that no major changes to the company’s operations seem to have recently taken place, there weren’t any reasons, at least according to the logic of traditional ‘investing canons,’ for the stock to start rising. On the contrary, many hedge funds bet on its further decline, in other words shorting the company.
👉A short position is a trading technique where an investor sells a security with plans to buy it later at a lesser cost, anticipating that the security price will fall in the short term. It is common practice for short sellers to borrow stock shares from an investment bank or another FI. While the share is in the short position, a fee is paid to the lender.
Shorting is rewarding when the stock performs as anticipated by dropping down, however, it can also be very risky when the stock behaves against odds and could lead to the dangers of a short-squeeze— a scenario we witnessed with GameStop’s stock.
👉 While the potential for profit in a short position is limited to the stock’s distance to zero, therefore making it finite, the potential for losses is infinite, as the stock could continue rising for years. When a heavily shorted stock, which was the case with GameStop, suddenly begins to increase in price, the traders that are in the short positions begin to cover the stock in order to avoid further losses. This, in turn, pushes the price even higher resulting in what is known as a short-squeeze.
So why did GameStop’s stock price increase in the first place?
This is, probably, the most amusing part of the story as it is a new phenomenon which required quite the coordination and collective action of rather unrelated strangers. You could even say this has some aspects of a unique mini social movement protesting against ‘big investment players and their privileged rights in the investment market.’