Why GameStop Shares Skyrocketed? What Is Short Squeeze

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Why is everyone talking about GameStop?

Its stock price has skyrocketed — by somewhere around 8,000% over six months.
It has seen its stock surge about 1,000% in two weeks,
After a group of amateur investors active on the online forum Reddit banded together to fight the Wall Street funds that had pushed its price lower.

What is GameStop?

GameStop is a video game retailer.
Like most stores that still sell products in person, it has had a hard time lately as video game sales have moved online and as the Covid-19 pandemic keeps people away from stores.
It’s still in business, but few people expect it to grow
On January 12, the share of GameStop — an American video game and gaming merchandise retailer — closed at under $20 per share.
In a matter of 10 trading sessions, the stock has jumped by over 15 times.
In a similar trend, the share price of the movie theatre chain AMC Entertainment jumped 300% on Wednesday to close at $19.88, taking its market cap to $6.74 billion.

But why this rise?

The unprecedented rally in these stocks is a result of an extraordinary frenzy among retail traders,
As they organised on the message board site Reddit to push up the share price.
And as the share prices jumped, it forced the short sellers in the stock to go for a ‘short squeeze’, leading to the staggering jump in share prices.

What is a short squeeze?

Short squeeze is a term used by market participants to refer to a phenomenon where short sellers in a stock who have placed their bets on a stock’s fall,
Rush to hedge their positions or buy the stock in the event of an adverse price movement, in order to cover their losses.
This leads to a sharp rise in demand for the share, and huge rally in share prices.
For example, if a trader expects that the price of stock X would fall to Rs 80 from Rs 100,
He/she might take a short position in the stock to sell it at Rs 100, when actually the market price is much lower.
However, if the stock price of the company starts rising, and jumps to Rs 120, the short seller starts incurring big losses —
As she would have to sell the share at Rs 100 and deliver it after buying from the market at Rs 120.
In order to cover his loss, the trader who was initially short on the stock, starts buying the stock, which leads to a sharp rise in the share price of the stock.
This phenomenon, where the short seller is buying the stock to cover her loss, is referred to as short squeeze in market parlance.
It leads to a dramatic rise in share price, far beyond its fundamentals.
But how come retail investors know about short positions?
In developed markets, hedge funds and other investors have to disclose their short positions in any company, if it crosses a certain threshold.
And as retail and other investors can find out such positions in the market,
They can target a funds position by organising and buying that stock, and forcing the short seller to reverse her position.

Global phenomenon

Several stocks in the US, the UK, and other European markets are witnessing this phenomenon, and certain companies are seeing a staggering rise in their share prices.

Q) Which of the following is not a function of the Securities and Exchange Board of India (SEBI)?