There is no doubting the fact that these are exciting times for investors of GameStop stock. The reason is quite simple – its stock price seems to be increasing in recent times more than ever before. Experts have referred to the rise as “meteoric”. As of 28th January, it was reported that GameStop shares managed to close out around $325. This represented a spike of around 70%. Its stock rose within such a short space of time which is quite astonishing.
The activities of short sellers
The roles of short sellers in this price increase over the past 7days have been very obvious. Short selling is a concept whereby investors borrow stock with the aim of buying them once their prices drop. After buying the stock at lower price, they will then have it returned to the lender. The intention is to make profit on the price difference. The only way a short seller will experience loss is when the price of stock he has borrowed increases like the case of GameStop.
In a bid to take advantage of the rise in price of GameStop shares, there are lots of short sellers in the market. They will likely be squeezed out though given how the prices are expected to rise. In other words, they will exit the trade through having to buy such stock at a price that is much higher. This is what GameStop stock is experiencing at the moment. According to experts, it is only following the natural law of demand and supply. This states that an increase in demand of stock can drive the prices up in an unusual way.
The contribution of short sellers to the increase in GameStop price is about 70%-80%. This means their unusual demand for the stock has contributed to skyrocket the prices even more. As a matter of fact, the short interest is constantly increasing. This is a situation whereby many shares have been sold short. However, they are yet to be closed out. In the month of January, this stood at around 140%. However, there are signs that it is gradually coming to an end since it is currently standing at 39%. When short interest is extremely high, it is a sign that investors are starting to express pessimism.
The unusual short selling that has characterized GameStop stocks is quite alarming. For instance, a group of short sellers may express optimism and decide to exit the trade by having to buy shares. However, there are other short sellers joining the market. With this, experts have predicted that the prices of GameStop shares will only experience an upward pressure. This is because too many short sellers are in the market in expectation that its prices will drop thereby giving them the chance to make some profits from whatever shares they have borrowed. Due to such an increase in the number of activities, the prices are expected to become high in the next coming weeks instead.
What could have happened?
Having read about the activities of short sellers and why they seem to be showing interest all of a sudden in the stock of GameStock, you must be asking what has led to this sudden increased sense of optimism. The truth is that there is one major reason why the stock price of GameStop has made headlines over the past few weeks. The company has been written off over the years as investors had considered it a dead prospect. All of a sudden, its stock price has increased tremendously.
For a start, there are numerous reasons why this company had been written off by most investors. For instance, most are of the opinion that its best days are over. This is because it has not been able to embrace the digital era where games have to be downloaded. Instead, it belonged to the pre-internet era. This was when people had to drive to shops in order to purchase their favorite games. Times have changed and GameStop has been left behind by other major brands that have been able to embrace the practice of ecommerce. It seems to be struggling to catch up with these companies at the moment.
The reason is because they have a way of enabling people to explore their games via the internet. All that is required is having such games downloaded from the comfort of their homes and they are good to go. It means there won’t be any need to visit any local shop in search of the latest games. This is a sign that GameStop is gradually going extinct. It has lost its mojo and competitive edge due to the advent of the internet which is now playing a major role in the life of everyone on a daily basis.
After all, this is the 21st century and people don’t have to wait so long before playing their favorite games. The mall business once thrived some decades ago. However, it is fair enough to conclude that it is not doing well in this technological era when the internet seems to be ruling the world in various ways. With the company’s demise around the corner, short sellers have decided to take the initiative.
How did the company’s stock increase?
Short sellers only found an opportunity to make money from a dead company that can’t seem to compete favorably with its rivals. They were happy it was about going extinct and decided to take the risk of short selling its stock. Of course, it is riskier to short sell a stock than owning one. The reason is quite simple to grasp – if you are the owner of a stock, your amount invested is going to represent your loss should any unfortunate event occur. For instance, if you decide to buy Playstation shares worth $100, and the company eventually crashes, it simply means you have lost your $100 investment.
However, short selling exposes you to limitless losses. For instance, if you decide to short sell Playstation at $100 and there is an idea that drives its stock price forward up to $600, it means you have lost about $500. The most unique thing about GameStop stock price is that it is short sellers who have managed to indirectly drive it upwards through their activities. Even though some of them are trying to buy back the shares as a way of cushioning the effects of their losses, there are others who seem to be entering the market with the hope that the company will soon crash.
Here is another obvious reason
The above trend has only brought about a situation known as “short squeeze”. At a time, the “greed factor” set in for short-sellers. This time around, they did not just want to bet against the fortune of GameStop. Their plan was to grind its stock down through having to buy over what was available as a float. Simply put, the shares they bought were far more than what GameStop had available in the stock market. There was a time when stocks were only being sold and not bought. This was a problem created by WallStreetBets subreddit, a plan to drive the price upwards. While short interest reduced drastically, the price of shares increased by around 30%.
r/WallStreetBets users were able to achieve this feat by convincing its huge subscriber base of over 2million members to purchase GameStop stock. The aim was to ensure a short squeeze is triggered. It was about creating the impression that the stock was valuable which in the real sense it wasn’t. This was done for two reasons – for fun and profit making. Once its members started purchasing them, this created a situation whereby short sellers wanted more of it. All of a sudden, the once abandoned stock of GameStop had become highly valuable. Just like every other venture, there must always be losers and winners.
According to Bloomberg, short sellers lost over 80billion dollars in January and investors in GameStop stocks are part of this shocking stat. On the other hand, there were people who made lots of money from this event. For instance, a user on WallStreetBets subreddit claimed to have made around $300,000 due to the price increase.
What is the future of GameStop stock price?
After all of the fiasco around GameStop, the company is looking forward to a brighter future. There are a lot of new professionals that have great experience with ecommerce. The former Chewy CEO – Ryan Cohen as well as many other people and a resignation from the current CFO – Jim Bell.
They have a lot of plans about the company in mind – transition from primary physical stores to ecommerce, hosting esports events and many more. These are all factors that indicate GameStop being a good long term investment.