What the Heck Happened with GameStop?

If you didn’t participate in the market frenzy over the last few weeks, you at least heard about it and you’re probably wondering… what on Earth is shorting a stock? 

First of all, short selling is incredibly risky and requires sophisticated market knowledge and the use of a margin account.  It can result in massive financial loss, so I recommend consulting your financial advisor to discuss this.  Selling a stock short means that an investor sells a stock that they’ve borrowed.  They hope the stock price will go down so that when they buy the stock back they’re buying it for less than the sell price, resulting in a profit. 

So, what happened with GameStop?  Basically, spontaneous increased buying volume hyped up by social media drove up the price of GameStop’s stock, which meant that the short sellers were losing money because the price they had to buy the borrowed stock back at was way higher than the sell price.  Phew, say that ten times fast!

While all of the short sellers are trying to buy back the stock as the price is continuing to rise, the stock price is being driven even higher and panic buying sets in just like when everybody was buying hand sanitizer at the beginning of the pandemic and people were trying to sell hand sanitizer for insane prices.  Just like the hand sanitizer situation, the short sellers have to continuously play catch up and end up having to buy back the stock shares at prices that are quickly increasing, driving the price of the stock even higher.

I hope this was helpful in understanding short selling and what happened with GameStop.  Fill out the contact form if you have additional questions, I’m always happy to chat.