![]() This occurred after Michael Burry acquired a small (about 3.3 percent) stake in GameStop (Kim, Heejin, 2021) and Ryan Cohen made a large investment in the company and eventually joined the company’s board (Stewart, Emily, 2021). However, after nearly three years of underperforming, the GameStop stock finally started to rise in value in September 2020 when many retail investors started to speculate that the stock was, in fact, undervalued. GameStop, “an American chain of brick-and-mortar video game stores” (Section F, Tom, 2017), has been adversely affected in recent years due to the growing popularity of digital distributors of video games and the COVID-19 pandemic, which reduced in-person sales and decreased profits.Īs a result, led to a decline in the GameStop stock’s value and caused a lot of institutional investors, primarily hedge funds, to short sell the stock. This panic-driven, rapidly increasing demand for the asset only puts more upward pressure on the asset’s price, adding to the misery of the short sellers, and is essentially called a short squeeze (Mitchell, Cory, 2021).Īfter understanding the mechanics of a short squeeze, it might be straightforward to make a connection between the rapid rise in the value of the GameStop stock and the massive losses faced by numerous hedge funds in the US and other countries. Now, if an asset’s price/value rises in the future, for example, as a result of an increase in demand for the asset, the investors who had a short position on the asset will be compelled to buy the asset, in order to prevent facing any further losses. ![]() On the other hand, a short position is when the investor sells a stock (or any other security) they don’t own (usually through borrowing stocks with the help of a stock broker and then paying back a fee in the future) with the expectation that the asset’s value will fall in the future. The two main positions that an investor can take towards a company’s stock is either a long position or a short position.Ī long position is when an investor owns a particular stock (or any other security) and holds on to it with the expectation that its value will rise in the future and they will make a profit. It is important to first explain the process the stock underwent that caused such a massive rise in its value: a short squeeze. Before looking at the GameStop stock in detail. Or sheer inexperience of investors, the stock’s volatility, as well as herd mentality. And expected future growth, high demand for a stock can also result from the overconfidence. Although people’s demand for a company’s stock is primarily based on the company’s current profitability. ![]() ![]() When the demand for the stock increases, the price of the stock rises and vice versa. However, a stock’s price is also largely affected by the forces of demand. Which is when a company goes public and shares of the company are listed on the stock market for the first time. This is especially true during an Initial Public Offering (IPO). These models state that the current price of a stock is equal to the sum of all its expected future dividend payments discounted back to their present values. The most fundamental way to give a certain value or price to a company’s share is to use a dividend discount model, the most common of which is the Gordon Growth Model. When you own a company’s stock, you essentially own a small part of the company, depending on how many shares the company has made available to the public, and thus have the right to claim a part of the profits made by the company in the form of dividends. It’s useful to begin by understanding how the stock market functions and how company’s stocks are priced. What caused the GameStop stock to skyrocket, and how did this lead to the downfall of several hedge funds? How did these events impact other stakeholders in the world economy? What did this unprecedented incident teach us about the nature of the stock market? These are the questions that this paper will be addressing. Despite such a steep rise in the stock’s value, a large number of hedge funds suffered huge losses on their investments and saw their values fall by almost 50%. (GME) stock rose from $17.25 to $325.00, which is almost a 1900% increase in valuation (Yahoo Finance, 2021). A Detailed Overview of the GameStop Short Squeeze From Januto January 29, 2021, the GameStop Corp. ![]()
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