The past several months have been hard, especially for the stock market. Prior to the “corona era,” the stock market was sky-high, however the spread of the pandemic shot it to rock bottom. Since then, the market has been recovering and many stocks have rocketed alongside this recovery; the most impressive of which is GameStop.
Over the course of the past 6 months, the GameStop stock price has risen over 8,000% percent. This is one of the most unexpected changes that has ever occurred to a stock, however, what’s the reason for this change? This smaller-scaled stock was clearly overvalued and had no place rising to such a high place. A week ago or so, there was a ‘power struggle’ between a hedge fund, Melvin Capital, and amateur traders, which triggered a response in the market. Both GameStop and AMC had an extremely similar situation where the hedge fund made a sort of ‘bet’ called shorting the stock, where they predicted that the stock would lose immense value. This is basically the put and call method in the stock market where one would ‘bet’ that the stock would either rise or fall in a certain period of time. As a result of these events, GameStop became one of the most short stocks in history.
All this might be fuzzy to any average Joe who doesn’t study the stock market, but let’s simplify the situation. The real situation is that on one hand, the hedge fund is basically over shorted, which means that they bet that more than 100% of the stock would lose value, but, as one may be thinking, in this real-world scenario, over 100% is wrong and likely illegal.
At the same time that all this maneuvering is happening, small individual investors decide to buy the stock, publish the buy on social media, and thousands of people follow suit. The result is the over-value, which leads to the hedge fund losing over 35 million shares and millions of dollars worth of stocks.
Basically, after this hedge funds made these bets, the stock skyrocketed as websites such as Reddit exposed these bets to the public. Then, these people began to rapidly buy the stocks, which caused the price to rocket. But, how did the small guys buy this stock? They were using sites like RobinHood, which later decided to stop trading GameStop stock. There was speculation as to whether this came from pressure of the big guys (hedge funds) to avoid higher loses or if it was due to other reasons.
Moises Sutton, Class of 2023, responded to this event by saying, “The fact that the stock rose that high is insane! GameStop should not have risen that high, and starting now, so many things are going to change.” Alexandra Serfaty, also Class of 2023 said, “ In my free time I like to look at many stocks, but when I saw this I thought something extremely illegal went down. The more I looked into it the more I was shocked about how these hedge funds triggered such an insane reaction.”