For the third week in a row, GameStop stock dramatically spiked and continues to resist short sellers. We know what you’re thinking: wait, GameStop is still in business? The struggling retailer welcomed Chewy Co-founder and former CEO Ryan Cohen to its board on January 11 with a 9% stake that he later upped to 13%. This was the start of the rally.
[ Read: Here’s What Happens to Your Stock if a Company Goes Bankrupt ]
Then r/WallStreetBets, a popular subreddit, entered the scene. Reddit users and retail investors realized that if they worked together, they would be able to manipulate stock prices by making bets on a rising market set to expire quickly.
Since the Reddit rally began, GameStop has seen over 175 million shares traded. This attracts short investors, who bet on other investors’ stock, and sell it to buy it back when prices fall and return it to the original owner. Ultimately, they make money off of the difference in stock price.
What happens if the stock price goes up?
Calls to continue to buy more shares and get out of the trade can cause prices to spike — causing what’s known as a “short squeeze.” Experts say the trend won’t last, citing price and low valuation levels as unsustainable. Yet, the online movement hasn’t shown any signs of slowing.
Is GameStop the unicorn of 2021?
Short squeezes aren’t limited to GameStop. We’re actually seeing them across the market in both Bed, Bath & Beyond and AMC. BBBY currently has around 64% of available shares tied up in short bets. If both companies see stock prices go up, too, this means that short-sellers have to rush to buy back shares or accept losses. AMC is at 24% now that they’ve revealed they have enough money to make it through 2021.
Should you buy a stock?
When online message boards encourage you to buy stocks, should you? The average person probably shouldn’t — unless you have money in your budget set aside for investing. Additionally, there is a significant risk involved.
[ Read: 12 Things You Need to Know Before Investing in Stocks ]
It is also undeniable that some have made millions on the squeeze. But you never want to ignore the fact that there is a chance to lose it all. It’s not unusual to experience some losses as investment values go up and down, so understanding how to bounce back is key to protecting your finances. If you do decide to try your luck, just do us a favor and don’t hold the billion-dollar payoffs as the standard.
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