The Recent GameStop Stock Phenomenon

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Even if you are not a stock investor or you don’t follow market performance like a religion, you have probably heard of the latest news on GameStop, the video game retailer.

GameStop’s stock spiked from roughly $65 a share just before this past Monday to an intraday high over $480 on Thursday before closing around $236. This stratospheric rise of the video game retailer alone is enough for an awe-inspiring financial news story. But who were buying that caused the stock to rise to such high? There is more to this story.

The rise is fueled by traders in the WallStreetBets Reddit group and caused a short squeeze for the hedge fund short sellers who have bet against GameStop and shorted its stocks. What is a short squeeze? A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to stop even greater losses, according to Investopedia. Their scramble to buy only adds to the upward pressure on the stock’s price. The Reddit group also pushed up prices of AMC and BlackBerry significantly. Trading restrictions on GameStop’s stock posed by brokerages and trading platforms angered traders and some lawmakers but also helped lowering the stocks’ prices.

The sudden surge of GameStop’s stock price created unintended consequences for funds containing GameStop. For example, two exchange traded funds, XRT and GAMR found that GameStop now accounts for 20% of their total assets. It also tests the SEC’s market manipulation rule and could have profound impact on the market in the future.